Public Bodies
Cases
Rowe, R v Vale of White Horse District Council
[2003] EWHC 388 (Admin) (07 March 2003)
Mr Justice Lightman:
INTRODUCTION
This is an application made by the Claimant (“Mr Rowe”) with the permission of Burton J for judicial review of the decision dated the 3rd January 2003 of the Defendant the Vale of White Horse District Council (“the Council”) to demand payment of retrospective charges for sewerage services over the preceding six year period. In the course of the hearing it became apparent that the real issue before the court was not a question of public law (the legality of the decision of the Council to demand payment) but a question of private law (whether the Council is entitled to the payments demanded). In the circumstances the just and convenient course is to treat the proceedings before me as the trial of the private law issue and give my judgment on that issue. When I told counsel that I intended to adopt this course, they expressed their concurrence.
The issue of private law raised is whether a claimant can recover payment for the supply of services under the principles of restitution where over the thirteen years that he made supplies to the defendant he never gave any intimation that he intended to make any charge for the supplies and in the circumstances the defendant reasonably believed that in obtaining such supplies he incurred no liability to the claimant or anyone else in respect of them. The issue is of some practical importance and merits anxious consideration.
FACTS
The Council as local housing authority built and operated a sewage treatment works and two pumping stations to provide for the disposal of sewage from its council houses in Letcombe Bassett and charged the costs of operating and maintaining the sewerage service to its Housing Revenue Account. The Council did not separately charge its tenants for the cost of the provision to them of the sewerage services, but (notionally at least) included the cost as part of the rents payable to the Council.
In 1982 the Council’s tenants began exercising their statutory rights to buy their homes. In the case of some of the conveyances to such tenants the Council exercised its statutory right under section 139 and Schedule 6 para 5 of the Housing Act 1985 to include covenants for payment of charges for the continuing provision of such services. No such provision was included in the conveyance to Mr Row’s predecessor in title who sold on to Mr Rowe in 1988. The Council entered into private contracts with the owners of certain properties which never belonged to the Council to provide sewerage services in return for payment for such services. No such contract was ever entered into between the Council and Mr Rowe or his predecessor in title. From 1982 until 2001, whilst the Council recovered payment from those who entered into contracts for payment for such services, the Council made no claim for any payment for sewerage services from any of the owners of properties which it had sold, least of all Mr Rowe. The reason for this lack of action during the period 1982-1995 was (according to the Council) an administrative oversight. The reason for the lack of action after 1995 related to the transfer in that year by the Council of its housing stock to Vale Housing Association. This transfer gave rise to an uncertainty in the mind of the Council whether the Council after making the transfer of the housing stock had the statutory power to retain and continue to operate the sewerage works and pumping stations. This uncertainty continued for some five years until October 2000 when the Council obtained the advice of leading Counsel that it did have the power.
Over the whole period from 1982 until the 26th March 2001 the Council gave no intimation to any house owner or occupier to whom it was providing sewerage services other than those with whom it had entered into contracts that there was any question of any charge being made for them. The explanation for the adoption of the deliberate policy to this effect adopted in 1995 is given in a statement by Mr Nigel Gifford whose responsibilities included the management of the sewerage facilities:
“My view and the view of the Council’s most senior lawyer was that it would not have been right to have notified residents when the legal position was so uncertain. That position did not become clearer until October 2000 when Leading Counsel’s opinion was received…. Vague and ambiguous comments by the Council about the possibility of charging at an earlier time might well have caused unnecessary anxiety to residents, when the position might subsequently have changed and in any event it would not have been within the Council’s power to bring the matter to a speedy conclusion.”
The decision to adopt this policy in order to spare the residents anxiety was short-sighted and calculated to create a false sense of security, for it was at the cost of the shock and distress occasioned when on the 26th March 2001 the Council wrote to the residents notifying them that a charge was to be made for use of the services over the last six years since April 1995. The letter (so far as material) stated as follows:
“The purpose of this letter is to inform you that every property will now be charged for the reception, treatment and disposal of sewage waste and the maintenance of the system. Since 1995, you have received the sewage treatment service without payment but you will appreciate that there has been cost to the Council in providing the service. You will be aware that the majority of sewage treatment plants across the County of Oxfordshire, and beyond, are operated and maintained by Thames Water Utilities and the residents benefiting from these plants are and always have been charged for the service as part of their water bill.
The Council now proposes to issue invoices to cover the cost of the service that has been provided over the period from April 1995 to the present.
The charges per property will be based on the actual costs of operating the individual works up to March 2001, and a proposed fixed annual charge of £250 for the year 2001/02. The charges will either be comparable to or less than the charges Thames Water Utilities would have made for similar services over the same period.
Recognising that six years worth of charges will be onerous for most owners, the Council will offer a facility to pay over two years (or longer by agreement) to clear the outstanding amounts, interest free.”
The letter understandably caused shock and distress to Mr Rowe. For over the thirteen years he had lived at his property, paid Council rates to the Council and water rates to the Thames Water Authority (“the TWA”), he did not know that the Council was providing the sewerage service. All he knew was that he paid all that was demanded of him by the Council and the TWA and he had had no reason to believe that there was a separately chargeable sewerage service which was not included within and satisfied by such payments. This state of mind was encouraged by the facts that no covenant for any such payment was made in the conveyance to his predecessor in title, no contract had been proffered by or made with the Council for sewerage services and the Council not merely had made no claim for thirteen years, but had deliberately and successfully over the last six years set out not to disabuse him of the impression that there was no question of any liability existing or accruing.
Mr Rowe protested that, if he had known that there was any question of such a liability arising, he would have wished to consider an alternative to continuing to accept the Council’s services (e.g. acquiring and using a septic tank) and would each year have made provision to meet the eventual liability. It is however clear on the evidence that there was no practical alternative to use of the Council’s sewerage services available at a price comparable to that which the Council intends to charge and Mr Rowe raises no defence of “change of position”. Mr Rowe was and is willing to pay the appropriate charges from the date of receipt of the Council’s letter which put him on notice of its intention to charge in the future, but he was and is unwilling to make any payment in respect of the prior period. The Council however insists on payment in respect of the prior period and gives as a reason the desire to prevent the shortfall arising from the non-payment by Mr Rowe and other owners of former Council owned properties having unfairly to be borne by other users of the services. The impasse led to the commencement of these proceedings.
The evidence before me establishes the following as the context in which the Council’s claim to payment is to be examined:
i) the disposal of sewage from a residential property is an essential, and (in the case of Mr Rowe) there was no practicable alternative at a comparable price;
ii) no local authority since 1974, when the function was transferred to (now privatised) water authorities, has provided sewerage services for the public paid for out of its General Fund (i.e. by Council Tax payers). The position in this regard is different from the position e.g. in respect of refuse collection. The sewerage service is a service targeted at specific properties rather than a service made available by the Council to all taxpayers but taken up by only a few;
iii) consequently householders have to pay separately from their Council Tax for sewerage services either by paying rates to the sewerage undertaker (here TWA) or by paying for the private disposal of their sewage, e.g. by the Council’s sewerage facilities or by arranging for the emptying of septic tanks. In a word Mr Rowe was not legally entitled to the provision of sewerage services except on terms that he paid for those services;
iv) the charges made by the Council are cheaper than any alternative available (including installation and use of a septic tank) and if fully informed at any time prior to 2001 Mr Rowe would have chosen to use the Council’s services and pay accordingly.
THE LAW
Where a supplier has supplied services to another and there is no contractual relationship in existence, the law may afford to the supplier a restitutionary remedy. Lord Wright stated in Fibrosa Spolka Akacyna v. Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 at 61:
“Any civilised 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 of the benefit derived from another which it is against conscience that he should keep.”
It is now authoritatively established that there are four essential ingredients to a claim in restitution:
i) a benefit must have been gained by the defendant;
ii) the benefit must have been obtained at the claimant’s expense;
iii) it must be legally unjust, that is to say there must exist a factor (referred to as an unjust factor) rendering it unjust, for the defendant to retain the benefit;
iv) there must be no defence available to extinguish or reduce the defendant’s liability to make restitution.
It is common ground between the parties that the first two and the fourth conditions are satisfied, for Mr Rowe obtained the benefit of the sewerage services provided by the Council and there is no defence available e.g. of change of position. Originally in a case such as the present of a supply of services, it was necessary in order to satisfy the second condition to establish a request by the defendant for the services. But under the developing law of restitution it is now enough if either of two principles are brought into play. The first principle is that the second condition is to be deemed to be satisfied if the defendant has freely accepted (or acquiesced in the supply for consideration of) the services rendered. The second principle is that in exceptional circumstances the second condition is to be deemed satisfied if the defendant has been incontrovertibly benefited from their receipt: see Goff & Jones The Law of Restitution 6th ed. para 1002. The Council in this action contends that Mr Rowe freely accepted the sewerage services rendered and by reason of such free acceptance in accordance with the first principle the second condition is to be deemed satisfied. An essential ingredient for application of the principle of free acceptance is acquiescence by the defendant in the supply of the services for a consideration (a matter to which I turn when I consider the third condition). In the absence of proof of such acquiescence, the principle of free acceptance cannot be invoked to satisfy the second condition. But it is common ground that the receipt of the services constituted an incontrovertible benefit and that the second condition is to be deemed to be satisfied for this reason.
The critical question is whether the third condition is satisfied. The council cannot suggest the existence of any unjust factor (e.g. a mistake on the part of the Council in providing the service or a failure of consideration). Paragraph 1-019 of Goff & Jones above reads as follows:
“… a defendant who is not contractually bound may have benefited from services rendered in circumstances in which the court holds him liable to pay for them. Such will be the case if he freely accepts the services. In our view he will be held to have benefited from the services rendered if he, as a reasonable man, should have known that the [claimant] who rendered the services expected to be paid for them and yet he did not take a reasonable opportunity open to him to reject the proffered services. Moreover in such a case he cannot deny that he has been unjustly enriched.”
In a word free acceptance may satisfy not only the second, but also the third condition.
On the facts of any ordinary case, a householder who receives and uses services from a supplier such as the Council must reasonably expect to pay for such services and will know that he has the option to reject them, and he will accordingly be liable under the principle of free acceptance to pay for them. This conclusion will in nowise be affected by the mere fact that the householder is unaware of the identity of the supplier: he may reasonably expect to pay the supplier whoever he may be. But the facts of this case are far removed from the ordinary case. Most particularly in the circumstances of this case and by reason of the administrative oversight of the Council over the period 1982 to 1995 and what can only be described as the extraordinary error of judgment by the Council between 1995 and 2001, the Council created and perpetuated the totally reasonable belief on the part of consumers of its services (and most particularly its former tenants) that there was no payment to be paid (beyond what was already paid to the Council and the TWA) in respect of the sewerage services and there arose no occasion for Mr Rowe to reject the services. The Council cannot establish (in the language of Goff & Jones) that Mr Rowe should have known that the Council or other supplier of the sewerage service expected to be paid for them anything beyond what was already paid to the Council and TWA. It is scarcely open to the Council to dispute this fact since on its own case the Council was ignorant until 2001 whether it could charge for the services and this ignorance was the occasion for its silence on the whole question. Where (as in this case) for good reason the defendant as a reasonable person should not have known that the claimant who rendered the services expected to be paid or paid extra for them, as a matter of principle the third condition cannot be satisfied and no claim can lie in restitution. Support for this view is provided by three authorities which establish that no claim lies against a defendant where there is a common understanding between the claimant and the defendant that a third party shall alone be liable to pay for the services supplied: (consider Bridgewater v. Griffiths [2000] 1 WLR 524 at 532); or where the claimant continues to foist his services on an unwilling defendant after the defendant has insisted that, if he does so, the defendant will not pay for them: (see Bookmakers Afternoon Greyhound Services v. Gilbert [1994] FSR 723); or where an architect, having agreed a fee for specified services, renders additional services where the client when he accepted them was reasonably entitled to assume that the architect was undertaking them for no additional charge: (see Gilbert v. Knight [1968] 2 All ER 248). In this case it does not matter that Mr Rowe has no defence of change of position. Under English law (unlike Continental law) it is a requirement of a claim in restitution that the claimant establishes the factor rendering it unjust for the defendant to retain the benefit of the services he has received: it is not incumbent on the defendant as a defence to the claim to establish that it is unjust for the liability to be imposed upon him: see Lord Hope in Kleinwort Benson Ltd v. Lincoln City Council [1999] 2 AC 349 at 408-9 and Mindy Chen-Wishart “In Defence of Unjust Factors”, Johnston and Zimmerman “Unjustified Enrichment” Cambridge 2002 pp.159-193. There was no free acceptance and accordingly there was no unjust factor. The third condition for a claim in restitution being absent, the Council has no claim in private law against Mr Rowe.
I accordingly hold that the Council has no legal right to the arrears which it claims. The Council is the author of its own discomfort. It was folly and short-sighted to place and deliberately leave the residents of its former Council houses in the dark. Its duty in its dealing with users of its services was to be transparent and disclose what might be in store from the beginning rather than to spring a surprise and later claim payment of arrears. By its failure the Council forfeited the right to charge Mr Rowe for its services. The consequences may have to be borne in the form of higher charges by other users. The burden of those higher charges may be a cause of complaint by those who have to pay them against the Council and its officers, but cannot make good the absence of an essential element in the Council’s cause of action against Mr Rowe.
– – – – – – – – – – – – –
MR JUSTICE LIGHTMAN: For the reasons set out in the judgment, which I have just handed down, I hold that the defendant council has no legal right to the arrears which it claims in the second appeal from the 1st April 1995 to the 31st March 2001.
MR HUNT: My Lord, a draft form of the order, which I think your Lordship will see, is agreed subject to one addition in the first paragraph of the order. Counsel has requested that it be inserted in the second line in its letter to Mr Rowe of 26th March 2001.
MR JUSTICE LIGHTMAN: Yes, that is fine.
MR HUNT: Subject to that, my Lord, no orders.
MR JUSTICE LIGHTMAN: Otherwise it is all agreed, is it?
MISS GREANEY: Yes, we do, my Lord.
MR JUSTICE LIGHTMAN: Then I will make an order on that. Thank you both very much.
The Child Poverty Action Group v Secretary of State for Work and Pensions
[2010] UKSC 54 (
Summary
Michaelmas Term
[2010] UKSC 54
On appeal from: [2009] EWCA Civ 1058
LORD BROWN
This appeal is all about the Secretary of State’s right to recover certain social security benefits. As everyone knows, a large amount of public money is spent upon a whole range of such benefits. Entitlement to these in all cases requires first a claim and then an award. Inevitably on occasion overpayments occur. Sometimes more is paid than the sum awarded. For example, following an award, say, of £60 a claimant may be sent by mistake a cheque for £120 or two cheques each for £60. These cases present no difficulty. Everyone agrees that unauthorised payments of this kind are recoverable by the Secretary of State as money paid by mistake. The problem arises rather when overpayments are made in accordance with an award but the award itself is higher than it should be. It is common ground that before any question can arise as to recovering the sums overpaid in these cases the mistaken award must first be revised. And it is common ground too that following such revision the Secretary of State is entitled to recover any overpayment resulting from misrepresentation or the non-disclosure of a material fact. All this is expressly provided for by section 71 of the Social Security Administration Act 1992 (the 1992 Act). But does section 71 provide an exclusive code for recovery? That is the question.
In short, what is in issue in this appeal is whether in other cases of mistakenly inflated awards – most obviously in cases arising from “official error” (as it is called in Regulations to which I shall come) – the Secretary of State is entitled to recover the sums overpaid. This question arises, for example, where a claimant has notified a change of circumstances (such as that he has begun full-time work or that his child has left the household) and by mistake the Department overlooks (or delays actioning) the notification and continues making benefit payments at the same rate; or, indeed, where there is simply an erroneous calculation of the award. In cases like that is the Secretary of State permitted to seek recovery of such overpaid benefits at common law or is the exclusive route to recovery that provided by section 71 of the 1992 Act?
The judge at first instance, Michael Supperstone QC, sitting as a deputy High Court Judge, found in favour of the Secretary of State – [2009] EWHC 341 (Admin), [2009] 3 All ER 633. The Court of Appeal (Sedley, Lloyd and Wilson LJJ) [2009] EWCA Civ 1058, [2010] 1 WLR 1886 – allowed the Child Poverty Action Group’s appeal and declared:
“where a benefit falling within section 71(11) of the Social Security Administration Act 1992 is paid pursuant to the machinery contained in Part I Chapter II of the Social Security Act 1998, it can only be reclaimed from the claimant under section 71 of that Act (or some other specific statutory provision).”
The Secretary of State now appeals to this Court.
The circumstances in which the question arose for decision can be briefly told. At some unspecified date (seemingly in about 2006) the Secretary of State adopted a practice of writing to benefit claimants who he considered had been overpaid, but where there had been no misrepresentation or non-disclosure, indicating that the Department had a common law right of action to recover the overpayment. The letters were in substantially standard form accompanied by a document headed “Questions you might have about the overpayment” and asserted essentially that a mistake had been made, that too much of the relevant benefit had been paid and that “the law allows us to ask you to pay back money that should not have been paid” (or words to like effect). From March 2006 to February 2007 some 65,000 such letters were sent. Although no common law claim for repayment was ever in fact brought in the courts, the letters led, we are told, to the recovery of substantial sums – for example, just over £4m in the year 2007/8. The Child Poverty Action Group, however, an organisation with a long history of bringing legal test cases on behalf of social security claimants, thought the letters were based on a false legal premise and so brought this challenge to seek appropriate declaratory relief. Thus it was that the issue came before the courts.
It is convenient at this point to set out the more material parts of section 71 of the 1992 Act (as amended). Section 71 appears in Part III of the Act under the title Overpayments and Adjustments of Benefit – Misrepresentation etc:
“71. – Overpayments – general.
(1) Where it is determined that, whether fraudulently or otherwise, any person has misrepresented, or failed to disclose, any material fact and in consequence of the misrepresentation or failure –
(a) a payment has been made in respect of a benefit to which this section applies; or
(b) any sum recoverable by or on behalf of the Secretary of State in connection with any such payment has not been recovered,
the Secretary of State shall be entitled to recover the amount of any payment which he would not have made or any sum which he would have received but for the misrepresentation or failure to disclose.
(2) Where any such determination as is referred to in subsection (1) above is made, the person making the determination shall in the case of the Secretary of State or the First-tier Tribunal, and may in the case of the Upper Tribunal or a court –
(a) determine whether any, and if so what, amount is recoverable under that subsection by the Secretary of State, and
(b) specify the period during which that amount was paid to the person concerned.
(3) An amount recoverable under subsection (1) above is in all cases recoverable from the person who misrepresented the fact or failed to disclose it….
(5A) Except where regulations otherwise provide, an amount shall not be recoverable under subsection (1) unless the determination in pursuance of which it was paid has been reversed or varied on an appeal or has been revised under section 9 or superseded under section 10 of the Social Security Act 1998….
(8) Where any amount paid, other than an amount paid in respect of child benefit or guardian’s allowance, is recoverable under –
(a) subsection (1) above;…
it may, without prejudice to any other method of recovery, be recovered by deduction from prescribed benefits.
(9) Where any amount paid in respect of a couple is recoverable as mentioned in subsection (8) above, it may, without prejudice to any other method of recovery, be recovered, in such circumstances as may be prescribed, by deduction from prescribed benefits payable to either of them.
(10) Any amount recoverable under the provisions mentioned in subsection (8) above –
(a) if the person from whom it is recoverable resides in England and Wales and the county court so orders, shall be recoverable by execution issued from the county court or otherwise as if it were payable under an order of that court; . . .”
Section 71(11) lists the various benefits to which the section applies. It is unnecessary to reproduce it here.
It is important to note that when the 1992 Act was passed, indeed at all times before 1998, the adjudication of awards and the payment of awards were constitutionally separate functions. Adjudication officers (and, before them, other independent officers) were responsible for all decisions concerning the making of awards, the Secretary of State for their payment. By sections 1 and 8 of the Social Security Act 1998 (the 1998 Act), however, the functions of adjudication officers were transferred to the Secretary of State who thereupon became the primary decision-maker in relation to the making of awards as well as remaining responsible for their payment. Prior to this merger of functions there had been provision for the revision of awards on a review (as well as the reversal or variation of awards on appeal). The 1998 Act introduced new provisions enabling the Secretary of State (by section 9) to revise, and (by section 10) to supersede, his section 8 decisions. This explains the language of section 71(5A). Essentially the same provision, however, had been made in section 71(5) which it replaced. As already noted, there could be no question of the Secretary of State ever seeking to recover an overpayment until the relevant award in one way or another had been formally corrected. These sections can be seen to reflect other provisions too in the governing legislation: regulation 17(1) of the Social Security (Claims and Payments) Regulations 1987 (SI 1987/1968) which imposes a statutory duty on the Secretary of State to pay the benefit awarded “for an indefinite period”, and section 17 of the 1998 Act by which the Secretary of State’s decision is declared to be final.
The next matter to note is that the 1992 Act was a consolidating statute. The immediate forerunner of section 71 had been section 53 of the Social Security Act 1986 which in turn had replaced both section 20 of the Supplementary Benefits Act 1976 governing the recovery of overpayments of the main non-contributory benefits and section 119 of the Social Security Act 1975 which governed the recovery of overpayments of contributory benefits. Section 119 had provided a defence if the claimant showed that he had exercised “due care and diligence to avoid overpayment.” All the other provisions had adopted the test of misrepresentation or failure to disclose that is now re-enacted in section 71(1).
The final point to note from the statutory material is the express provision made by regulation 3(5)(a) of the Social Security and Child Support (Decisions and Appeals) Regulations 1999 (SI 1999/991) (“the 1999 Regulations”) for a decision of the Secretary of State under section 8 or 10 of the 1998 Act to be revised with retrospective effect at any time if, inter alia, it “arose from an official error”.
Against this basic statutory background the Court of Appeal reached essentially the following conclusions. The statutory scheme provides for the revision of awards of benefit ab initio and once an award has been revised it is final in its revised form. Downward revision shows that the claimant was not, in fact, entitled to the whole of the payments received. It is rational for the legislature to make provision for the consequences and it is by section 71 alone that it has done so. Under section 71 no amount is recoverable unless the relevant determination has been successfully appealed, revised under section 9 or superseded under section 10. Section 71(1) then sets out the (sole) circumstances in which the Secretary of State is entitled to recover an overpayment made pursuant to an award. These include only cases where the original award was obtained by misrepresentation or non-disclosure, and exclude cases of receipt – even knowing receipt – of an overpayment due to a mistaken award. When section 71 was enacted, adjudication was separate from administration. The established statutory scheme had always been understood to be exhaustive of the rights, obligations and remedies of both the individual and the state, and both then and since, awards have been conclusive of the obligation to pay and of the right to receive payment. In such a context it is unsurprising that the power of recovery when an award is modified should be prescribed by Parliament and not at large. Section 71 has not excluded any power of recovery that was previously available but has created a power of recovery where otherwise there is none.
Mr Eadie QC for the Secretary of State disputes those conclusions. He contends that the Crown’s common law right to recover benefits overpaid by mistake of fact or law is not excluded by the legislation either expressly (so much is clear) or by necessary implication. There is, submits Mr Eadie QC, nothing inconsistent between the express right of recovery in cases of misrepresentation and non-disclosure provided for by section 71(1) and the common law right to seek recovery in other cases. The statutory right applies only to a limited class of cases and, where it does apply, it confers greater rights on the Secretary of State than would be available at common law. It does not allow the recipient of the benefit to rely (as would a common law claim) on a defence of change of position. And it allows recovery (a) from the person who misrepresented the fact or failed to disclose it (section 71(3)), (b) by deduction from prescribed benefits (section 71(8)), and (c) in certain circumstances from the prescribed benefits payable to either member of a couple (section 71(9)). All this is no doubt understandable: it is logical for Parliament to prescribe an easier route to recovery of overpayments against those actually responsible by misrepresentation or non-disclosure for the making of the mistaken awards in the first place. But non constat that this should be the only route to recovery. After all, the misrepresentation or non-disclosure might have been entirely innocent and the moral case for repayment against the recipient of an award inflated by official error might actually be stronger. The error might have been plain, obvious and major and the recipient well aware of it but determined to take advantage of it none the less. Such a view is supported too by regulation 3(5)(a) of the 1999 Regulations. Why make provision for the retrospective revision of mistaken awards arising from official error if it is not possible then to remedy the mistake? True, if the error disadvantages the claimant and he is underpaid, the error can be remedied retrospectively. But if the error leads to overpayment and the Child Poverty Action Group are right, there can be no recovery against the recipient. This would represent a lacuna in the scheme.
Mr Eadie in addition seeks to pray in aid what he submits is the analogous decision of the House of Lords in Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs [2006] UKHL 49, [2007] 1 AC 558 (“DMG”) by which the taxpayer was held entitled at common law to recover an overpayment of tax notwithstanding a statutory provision comprehensively dealing with overpayments in the case of anyone “who has paid [income tax or capital gains] tax charged under an assessment” (section 33 of the Taxes Management Act 1970). Given that section 33 did not apply in that case because there had been no valid assessment, the taxpayer was held permitted to bring a common law restitution claim. It is Mr Eadie’s submission that by the same token, given that the Secretary of State here cannot recover under section 71(1) save in cases of misrepresentation or non-disclosure, he should in other cases be entitled to seek recovery at common law.
I have not found this an altogether easy case and, like Sedley LJ in the court below, regard the arguments as “closely balanced”. In the end, however, with Mr Drabble QC’s help, I have come to the same conclusion as the Court of Appeal, namely that section 71 constitutes a comprehensive and exclusive scheme for dealing with all overpayments of benefit made pursuant to awards. Essentially my reasoning is as follows.
As everyone agrees, no question of the recovery of any overpayment can arise until the award has been corrected. So far as recovery under section 71(1) is concerned, this indeed is expressly stipulated by section 71(5A) (and section 71(5) before it). But it would be surprising to find a common law right to restitution on grounds of mistake to be similarly constrained and more surprising still to find no relevant provision (akin to section 71(1)) giving effect to such a right. As already noted, when section 71 was enacted, there was a division of functions between the adjudication of awards and their payment. Since the Secretary of State paid the benefit awarded pursuant to a statutory duty, there could be no question of his having made a mistake of fact or law in making the payment. Thus, as the Court of Appeal noted, section 71 and its predecessor sections created a power of recovery when otherwise there would have been none. This explains too why section 71 contains no express exclusion of any common law right of recovery: there simply was none and it is hardly surprising that no such exclusion was inserted in 1998 when the adjudicatory and payment functions merged. What, in short, is striking about section 71 is not its omission of an express exclusion of common law rights but rather its omission of any provision recognising or giving effect to any such rights.
As is well known, common law restitution claims are, at the best of times, far from straightforward. Not the least of their difficulties, a difficulty at its most pronounced in the context of social security benefit claimants, is the defence of change of position. Part III of the 1992 Act provides, of course, not just for an express entitlement to recover overpaid benefits in cases of misrepresentation or non-disclosure, but also for the whole process of determining the facts relevant to such entitlement, including making provision for appeals to a tribunal. It seems to me inconceivable that Parliament would have contemplated leaving the suggested common law restitutionary route to the recovery of overpayments available to the Secretary of State to be pursued by way of ordinary court proceedings alongside the carefully prescribed scheme of recovery set out in the statute. Such an arrangement, moreover, would seem to me to create well-nigh insoluble problems. Could there, for example, be parallel recovery proceedings against the maker of the misrepresentation under section 71(3) and against the recipient of the benefit at common law in the courts? And in the event of successful claims, could there then be deduction from prescribed benefits under section 71(8) against the misrepresentor (or possibly against the other member of a couple under section 71(9)) as well as execution against the actual recipient under the ordinary processes of law?
With regard to Mr Eadie’s point that a stronger moral argument for recovery of overpayments may exist in cases of the knowing receipt of mistaken awards than, say, in cases of innocent misrepresentation, I would pose these questions. First, this being so, why would Parliament not prescribe the same stronger recovery powers for these cases as for cases of misrepresentation and non-disclosure and include them within the statutory recovery scheme? Secondly, why would Parliament not make express provision for this separate category of cases, similarly prescribing the conditions for the Secretary of State’s entitlement to recovery, such as that the claimant knew that he had been overpaid and/or that he had not changed his position? The answer to both must surely be that in the case of recipients of social security benefits Parliament from first to last has taken the view that only those who themselves brought about the overpayments should be liable to reimburse them and that in their cases reimbursement should be made easily enforceable. Such a scheme is entirely rational. For better or for worse those benefiting from official errors are not subject to recovery proceedings. I am persuaded that section 71 does indeed necessarily exclude whatever common law restitution rights the Secretary of State might otherwise have. The title to Part III of the Act, Overpayments and Adjustments of Benefit, not merely suggests but to my mind provides for a comprehensive and exclusive scheme for both the correction and consequences of mistaken benefit awards.
As for Mr Eadie’s reliance on the DMG line of cases with regard to the tax regime, for my part I find the suggested analogy unconvincing. This is not for the reasons suggested by the Court of Appeal (see in particular Lloyd LJ’s judgment at paras 33-35), namely that DMG involved an overpayment to the state whereas the present case involves an overpayment by the state; that, I would agree with Mr Eadie, is neither a logical nor a principled distinction. Rather it is because, whereas section 33 of the Taxes Management Act 1970 only purported to deal with overpayments of tax charged under an assessment, leaving other overpayments to be dealt with outside the statutory scheme, section 71 deals with the overpayment of benefit pursuant to erroneous awards in all cases and, by necessary implication, deals too with the conditions for the recovery of such overpayments.
In the result, I would endorse the Court of Appeal’s declaration and dismiss this appeal.
SIR JOHN DYSON SCJ
The issue that arises on this appeal is whether the Secretary of State is entitled to recover at common law overpaid social security payments that were made pursuant to a decision made under section 8(1)(a) of the Social Security Act 1998 (“the 1998 Act”), or whether the right to recovery provided for in section 71 of the Social Security Administration Act 1992 (“the 1992 Act”) is the exclusive route to recovery. It is not in dispute that this raises a question of statutory interpretation. The answer to the question requires in the first place an understanding of the relevant statutory history.
The salient features of the history are these. The immediate precursor to section 71 of the 1992 Act (a consolidating Act) was section 53 of the Social Security Act 1986 (“the 1986 Act”) whose terms were not materially different from those of the later provision. Before 1986, the rule governing the recovery of overpayments of contributory benefits was contained in section 119 of the Social Security Act 1975 and the rule governing the recovery of the main means-tested non-contributory benefit (supplementary benefit) was contained in section 20 of the Supplementary Benefits Act 1976. Of critical importance is the fact that until the 1998 Act, there was a division between the adjudicating authorities responsible for fact-finding, decisions on legal issues and the quantification of the award on the one hand, and the body responsible for payment on the other. From 1986 onwards, the former was carried out by an adjudication officer and the latter by the Secretary of State. It was only in the 1998 Act that the Secretary of State was made responsible for both the decision on the claim for benefit and the payment of the amount of the award.
It follows that the interpretation of section 53 of the 1986 Act and section 71 of the 1992 Act must be considered against the background that at the time of those enactments there was no possibility of mistake on the part of the Secretary of State in the calculation of the award, since he played no part in its calculation. The only possibility of mistake on the part of the Secretary of State lay in the payment of the amount awarded to be paid. It is common ground (and rightly so) that, if the Secretary of State overpaid by mistake, the amount of the overpayment could be recovered by a common law claim in restitution. Section 53(4) of the 1986 Act and section 71(5A) as it now is of the 1992 Act show that the overpayments with which these statutes are concerned are those which result from changes to an award.
In deciding whether Parliament intended in 1986 and again in 1992 that the statutory provisions were to be an exhaustive code for recovery of overpayments by the Secretary of State, it is in my view relevant to recognise that at the time of those enactments there was no realistic possibility that the Secretary of State could recover overpayments of benefit in a common law action. By 1986, the law of unjust enrichment or restitution was by no means in its infancy. It was well understood that a person was in principle entitled to recover at common law money paid under a mistake of fact. But under the statutory scheme then in force, there would have been no relevant mistake on which the Secretary of State could have founded such a claim. Mr Eadie QC suggests that it might have been arguable in a case where there had been a mistake in the calculation of the award that a Secretary of State who paid such an award was operating under the mistake that the award was correct and/or that an analogy could properly be drawn with the position that applies where a court judgment is reversed. I acknowledge that such arguments might be advanced today, although I doubt whether they would succeed even now, after the considerable developments that have taken place in recent years in this area of the law. But it seems to me highly unlikely that Parliament would have had such arguments in mind in 1986 or 1992. In my view, the correct premise on which to proceed is that section 53 of the 1986 Act and section 71 of the 1992 Act were drafted on the basis that, as the law then stood, the Secretary of State was not entitled at common law to recover overpayments resulting from errors in the calculation of the award.
At first sight, therefore, one might think that this should lead to the conclusion that the statutory provisions for recovery of overpayments were intended to be exhaustive of the right to recovery. There was no common law right to recovery. A statutory right to recovery was introduced. By definition, therefore, the statutory right to recovery was intended to be exhaustive. That was the view of the Court of Appeal as expressed at paras 25 and 27 of the judgment of Sedley LJ and I agree with it. At para 27, he pithily summarised the argument that Mr Drabble QC has repeated in this court “which is not that section 71 has excluded any power of recovery that was previously available, but that it has created a power of recovery where otherwise there is none”.
But Mr Eadie has another string to his bow. He submits that, even if at the time of the enactment of sections 53 and 71 the Secretary of State had no right to recover at common law, it does not follow that, if there were a change in circumstances so that such a right to recover were to arise in the future, it would be precluded by the statutory provisions. As I understand it, Mr Eadie does not contend that the meaning of sections 53 and 71 could change over time. In this context, that would obviously be an untenable proposition. The position would of course be otherwise if section 71 were later amended expressly or by necessary implication. But that is not suggested here. Mr Eadie’s argument is directed to the true meaning of section 71 in its unamended form but he submits that it cannot be construed as having prospectively excluded by necessary implication a right which was not in contemplation at the time when it was enacted. In other words, Parliament cannot be taken to have excluded the possibility of a common law right to recovery arising in the future under a differently framed decision-making scheme.
I cannot accept this argument. I proceed on the hypothesis that, as I have already said, at the time when the statutory scheme for recovery of overpayments was enacted, there was no non-statutory route for recovery. The statutory scheme was exhaustive at that time. It carefully delineated the boundaries. They were limited to recovery of payments made pursuant to an award by the adjudicating authorities which was in error by reason of a misrepresentation or failure to disclose any material fact. Simple error on the part of the adjudicating authorities was excluded. I would not go so far as to say that Parliament can be taken to have excluded the possibility of a common law right to recovery under a differently framed decision-making scheme. That would be to go too far, since it would depend on the terms of the differently framed scheme.
But I see no basis for holding that Parliament intended to allow a common law right of recovery in circumstances where the only material difference between the pre-1998 Act scheme and the 1998 scheme is that under the latter the Secretary of State determined the awards. Under the pre-1998 Act scheme, the section 71 code precluded common law claims for mistake, so that the Secretary of State could not recover overpayments where an award was erroneous for one of the statutory reasons. That code was continued after the 1998 Act without any material change. The only difference now was that the Secretary of State was responsible for the calculation of the award. The inevitable inference is that post the 1998 Act, Parliament intended the same exclusive code to continue. There is no basis for holding that the change in the identity of the decision-maker, which was not accompanied by any change in the statutory criteria for recovery of overpayments, was intended to open the door any wider to recovery than it previously had been.
In my view, that is sufficient to dismiss this appeal. But I need to deal with a further argument advanced by Mr Eadie. This proceeds on the basis that, contrary to the view that I have expressed, in 1986 and 1992 the Secretary of State had a common law right to recover overpayments under ordinary common law restitutionary principles. He accepts that this right could be displaced by statute, but that could only be done expressly or by necessary implication. It is common ground that there was no express abrogation of the right. Nor, Mr Eadie submits, was it abrogated by necessary implication.
There are many examples of cases where the court has considered whether the provisions of a statute have impliedly overridden or displaced the common law. In each case, it is a question of construction of the statute in question whether it has done so. Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2006] UKHL 49, [2007] 1 AC 558 concerned a claim for compensation in respect of the payment of advance corporation tax which had been demanded contrary to the EC Treaty. One of the issues was whether section 33 of the Taxes Management Act 1970 excluded any common law claim on the grounds of mistake. Lord Hoffmann said at para 19:
“But the question is in the end one of construction. When a special or qualified statutory remedy is provided, it may well be inferred that Parliament intended to exclude any common law remedy which would or might have arisen on the same facts.”
To similar effect, at para 135 Lord Walker said:
“When Parliament enacts a special regime providing special rights and remedies, that regime may (but does not always) supersede and displace common law rights and remedies (or more general statutory rights and remedies). Whether it has that effect is a question of statutory construction.”
A similar issue arose in Revenue and Customs Commissioners v Total Network SL [2008] UKHL 19, [2008] AC 1174. There the question was whether the statutory scheme for recovery of VAT under the Value Added Tax Act 1994 was exclusive so as to preclude the right at common law to claim damages for unlawful means conspiracy. The House of Lords were split as to the result, but not, I think, as to the correct approach to the problem. Lord Hope said at para 31 that the statutory scheme was “comprehensive and does not admit the use by the commissioners of means for collecting VAT which are not provided for by the statute”. Lord Scott at para 60 said that an intention to bar common law claims could not “be attributed to the legislature when enacting the VAT scheme”. Lord Walker (paras 105 to 110) did not agree that the statutory code was comprehensive and exhaustive of the commissioners’ powers of collection of VAT. Lord Mance (para 130) said that for a statutory scheme to supersede or displace common law rights and remedies, “the statute must positively be shown to be inconsistent with the continuation of the ordinary common law remedy otherwise available”. He concluded (para 136) that he saw no “inconsistency or even incongruity” between the statute and the common law remedy in tort. Lord Neuberger identified a number of features of the statutory scheme which both substantively and procedurally were inconsistent with the position in relation to a common law claim. In other words, he explicitly applied the same inconsistency criterion as Lord Mance but, on the facts, reached the opposite conclusion.
It will be seen that in these two cases, the court did not apply a test of necessary implication. Mr Eadie derives that test from the context of human rights or the principle of legality explained by Lord Hoffmann and Lord Steyn in R v Secretary of State for the Home Department, Ex p Simms [2000] 2 AC 115. He relies, for example, on R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax [2002] UKHL 21, [2003] 1 AC 563, where the question was whether section 20 of the Taxes Management Act 1970 overrode legal professional privilege. The House of Lords held that it did not do so. Lord Hoffmann emphasised that legal professional privilege was a fundamental human right long established in the common law. At para 8 he said that an intention to override fundamental human rights “must be expressly stated or appear by necessary implication.” He referred to the discussion of this principle by Lord Steyn and himself in Ex p Simms and other cases. Lord Hobhouse made the same point. Having referred to Ex p Simms, he said (at para 44) that the principle of statutory construction stated in that case was not new and had long been applied “in relation to the question whether a statute is to be read as having overridden some basic tenet of the common law”. The protection given by the common law to those entitled to claim legal professional privilege is a basic tenet of the common law as had been reaffirmed by B (A Minor) v Director of Public Prosecutions [2000] 2 AC 428. It is in the context of such a common law right that the passage at para 45 which is relied on by Mr Eadie is to be understood. Lord Hobhouse said:
“A necessary implication is not the same as a reasonable implication as was pointed out by Lord Hutton in B (A Minor) v Director of Public Prosecutions [2000] 2 AC 428, 481. A necessary implication is one which necessarily follows from the express provisions of the statute construed in their context. It distinguishes between what it would have been sensible or reasonable for Parliament to have included or what Parliament would, if it had thought about it, probably have included and what it is clear that the express language of the statute shows that the statute must have included. A necessary implication is a matter of express language and logic not interpretation.”
In the case of B (A Minor), the question at issue was whether liability for an offence contrary to section 1(1) of the Indecency with Children Act 1960 was strict or required the proof of mens rea. It was held by the House of Lords that mens rea was an essential element of every criminal offence unless Parliament expressly or by necessary implication provided to the contrary. In so holding, they were doing no more than applying a well-established common law presumption or requirement. Lord Steyn explicitly referred at page 470F to this presumption as the “paradigm” of the principle of legality.
The context in the present case, however, is quite different. The question whether the Secretary of State can recover overpayments of benefit does not involve any fundamental human rights of the Secretary of State nor does it engage the principle of legality. I do not accept the submission that the respondents have to surmount the high hurdle erected by Lord Hutton in B (A Minor) or Lord Hobhouse in Morgan Grenfell. Rather the question is whether, as a matter of statutory interpretation, section 71 is an exclusive code for recovery of overpayments. That question is to be answered not by applying any presumptions or by saying that the common law remedy in restitution is not displaced unless, in Lord Hobhouse’s words, as a matter of logic, it cannot co-exist with the statutory regime for recovery.
The importance of the tax cases is that they show that the test is whether in all the circumstances Parliament must have intended a common law remedy to co-exist with the statutory remedy. Lloyd LJ sought to distinguish the tax cases to which I have referred on the grounds that payments by the state to a person have nothing to do with the tax regime. He said that the difference between recovery of a social security benefit wrongly paid to a claimant on the one hand and of tax paid by a taxpayer on the other is “substantial and significant”. Of course, I accept that they are different, but like Lord Brown I do not consider that the difference is material to the question whether Parliament intended a statutory code to displace common law rights and remedies. There is nothing in the reasoning in the tax cases to indicate that the courts were applying a rule which was peculiar to tax cases. Indeed, for example, Lord Mance at para 130 of Total Network SL referred to non tax cases such as Marcic v Thames Water Utilities Ltd [2003] UKHL 66, [2004] 2 AC 42 and Johnson v Unisys Ltd [2001] UKHL 13, [2003] 1 AC 518 as being illustrative of the principle that he had articulated.
If the two remedies cover precisely the same ground and are inconsistent with each other, then the common law remedy will almost certainly have been excluded by necessary implication. To do otherwise would circumvent the intention of Parliament. A good example of this is Marcic where a sewerage undertaker was subject to an elaborate scheme of statutory regulation which included an independent regulator with powers of enforcement whose decisions were subject to judicial review. The statutory scheme provided a procedure for making complaints to the regulator. The House of Lords held that a cause of action in nuisance would be inconsistent with the statutory scheme. It would run counter to the intention of Parliament.
The question is not whether there are any differences between the common law remedy and the statutory scheme. There may well be differences. The question is whether the differences are so substantial that they demonstrate that Parliament could not have intended the common law remedy to survive the introduction of the statutory scheme. The court should not be too ready to find that a common law remedy has been displaced by a statutory one, not least because it is always open to Parliament to make the position clear by stating explicitly whether the statute is intended to be exhaustive. The mere fact that there are some differences between the common law and the statutory positions is unlikely to be sufficient unless they are substantial. The fact that the House of Lords was divided in Total Network SL shows how difficult it may sometimes be to decide on which side of the line a case falls. The question is whether, looked at as a whole, a common law remedy would be incompatible with the statutory scheme and therefore could not have been intended by co-exist with it.
I agree with Lord Brown that, for the reasons he has given, section 71 was intended to be an exhaustive code. Some of the difficulties that he has highlighted at para 14 of his judgment are similar to those mentioned by Lord Neuberger in Total Network SL. As Lord Millett put it in Unisys at para 80 of his speech, “the co-existence of two systems, overlapping but varying in matters of detail…would be a recipe for chaos”. That is a powerful reason for supposing that Parliament intended the statutory code contained in section 71 of the 1992 Act to be exhaustive.
For these reasons, as well as those given by Lord Brown, I would dismiss this appeal.
LORD RODGER
As Lord Brown and Sir John Dyson have explained, until 1998 there was no real possibility of the Secretary of State making a mistake in the calculation of an award that would have founded a common law claim for money paid under a mistake. Precisely for that reason, when originally enacted, section 71 of the Social Security Administration Act 1992 (“the 1992 Act”) could never have been intended to exclude such a claim. It is therefore, at first sight, surprising if that section has the effect of excluding a claim of that kind which might otherwise have become available when the system was altered in 1998.
When it enacted section 71 in 1992, Parliament intended it to be the only basis for the Secretary of State to recover a benefit payment that had been wrongly calculated. The question is whether, when it enacted the Social Security Act 1998, it changed its view. The only provision in that Act which suggests that Parliament may have changed its mind is section 9(3). It provides that, where the Secretary of State revises a decision, the decision is to take effect “as from the date on which the original decision took (or was to take) effect.” If the respondent’s approach is correct, in a case where the revision is downwards in favour of the Secretary of State, Parliament’s decision to give the revision retroactive effect seems to have no practical effect. That consideration has caused me real difficulties.
Section 9(3) creates the problem, however; it does not solve it. If, by enacting section 9(3), Parliament intended the Secretary of State to be able to bring a common law claim for restitution, realistically, it could have been expected to amend section 71 of the 1992 Act. It did not do so. If, on the other hand, Parliament overlooked the possibility of such a claim, then the appropriate conclusion must be that section 71 was to continue to provide the only basis for recovering a benefit that had been wrongly calculated. With some hesitation, therefore, I have come to the conclusion, for the reasons given by Lord Brown and Sir John Dyson, that section 71 should be interpreted as excluding a common law remedy in this situation. Whether a remedy should be available in these cases is a matter for Parliament, not for this Court.
LORD PHILLIPS
For the reasons given by Lord Brown and Sir John Dyson, which are in perfect harmony, I would dismiss this appeal.
LORD KERR
I have read and agree with the judgments of Lord Brown and Sir John Dyson. For the reasons that they have given I too would dismiss the appeal.
Sempra Metals Ltd v. Revenue & Anor
[2007] UKHL 34
LORD HOPE OF CRAIGHEAD
My Lords,
This is a case about the award of interest. Questions about interest usually arise where the claim is presented as ancillary to a claim for a principal sum for which the court is asked to give judgment for the recovery of a debt or as damages. Less usually they can arise where interest is sought on a principal sum which has been paid before judgment. But in this case interest is the measure of the principal sum itself.
The question is how that sum should be measured. It is agreed that the calculation of interest should be the method of measurement for the sum that is to be awarded. But the parties are at issue as to how the interest should be calculated. The choice is between simple interest and compound interest. If simple interest is used, it is agreed that it should be at the rate that is appropriate for the calculation of an award of interest under the statute. If compound interest is used, various methods of calculation are available and there is a dispute as to how it is to be calculated in this case. That issue, however, is peripheral to the important question of principle which arises on this appeal: is the claimant who seeks a remedy on the ground of unjust enrichment entitled to an award for restitution of the value of money that is measured by compound interest?
Interest: an introduction
The question of principle is much easier to state than it is to answer. But it may be helpful, before turning to the facts, to set the scene by looking briefly at the question of interest generally and then seeing how the issue in this case fits in to that wider context.
The jurisdictional routes in English law to an award of interest are to be found in statute, equity and the common law. Simple interest is available under the statute on a sum for which judgment is given for the recovery of a debt or damages or where a sum of that kind is paid before judgment: see section 35A(1) of the Supreme Court Act 1981, inserted by the Administration of Justice Act 1982, section 15(1) and Schedule 1, Part I. Interest is available in equity in cases that lie within equity’s exclusive jurisdiction, especially in cases of fraud or against a trustee or other person in a fiduciary position in respect of profits improperly made. It is also available in the exercise of equity’s jurisdiction in aid of rights that are enforceable at common law. In cases that lie within equity’s exclusive jurisdiction compound as well as simple interest is available. As Steven Elliott, “Rethinking Interest on Withheld and Misapplied Trust Money” [2001] 65 Conv 313 puts it, when applying the inherent jurisdiction the courts have been able to craft interest awards that meet economic realities. But where equity is invoked in aid of the common law the reverse is true. In Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 the House held, by a majority, that it would be usurping the function of Parliament if it were in equity to award compound interest in aid of the bank’s common law claim for repayment of the principal sum, as the court was not authorised to award compound interest in the exercise of its common law jurisdiction under the statute.
The common law jurisdictional route is more complicated. The general rule of English common law is that the court has no power, in the absence of any agreement, to award interest as compensation for the late payment of a debt or damages: London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429. The decision in that case does not fit happily with Lord Westbury’s statement in Carmichael v Caledonian Railway Co (1870) 8 M (HL) 119, 131, which identified the principle that still applies in Scots law, that interest can be demanded only in virtue of a contract express or implied “or by virtue of the principal sum of money having been wrongfully withheld, and not paid on the day when it ought to have been paid.” But the House felt bound to apply the law of England that was laid down by Lord Tenterden CJ in Page v Newman (1829) 9 B & C 378, 381 and endorsed by Lord Tenterden’s Civil Procedure Act 1833. In 1952, however, it was recognised that loss due to late payment might be recoverable if it constituted special damage within the contemplation of the parties under the second limb of Hadley v Baxendale (1859) 9 Ex 341: Trans Trust SPRL v Danubian Trading Co Ltd [1952] 2 QB 297. This modification of the common law rule was approved in President of India v La Pintada Compania Navigacion SA [1985] AC 104.
To allow a claimant to recover special, but not general, damages for loss of the use of money is widely seen as illogical. In Hungerfords v Walker (1989) 171 CLR 125, 142 Mason CJ said that it subverted the second limb in Hadley v Baxendale from its intended purpose, which was to allow loss arising from special circumstances of which the defendant had actual knowledge in cases where the loss did not fall within the first limb because it did not arise from the ordinary course of things. The decision in London, Chatham and Dover Railway Co v South Eastern Railway Co seemed to have been based on the view that interest by way of damages was too remote: see also Trans Trust SPRL v Danubian Trading Co Ltd [1952] 2 QB 297, 306, per Denning LJ. Why then, Mason CJ asked, is the claimant not entitled to recover damages for the loss of the use of money when the loss or damage was reasonably foreseeable as liable to result from the relevant breach or tort?
The claim that is made in this case, however, is for restitution. It is presented as a claim for the time value of money by which the defendant was enriched unjustly. The claimant submits that the common law requires that it be paid a sum which represents the value of the money over the period of that enrichment, and that this sum falls to be calculated by compounding interest over that period. It has been held that in an action for money had and received the net sum only can be recovered: Moses v Macferlan (1760) 2 Burr 1005; Fruhling v Schroeder (1835) 2 Bing (NC) 78 and Johnson v The King [1904] AC 817, applying London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429. But interest has been awarded at common law where restitution follows the reversal on appeal of a previously satisfied judgment: Rodger v Comptior d’Escompte de Paris (1871) LR 3 PC 465. Various other exceptions have been recognised: see Heydon v NRMA Ltd No 2 (2001) 53 NSWLR 600, 603-606, per Mason P. Furthermore the claim in this case is not for more than what was had and received by the defendant. What was had and received was the enrichment. It is the enrichment itself that is to be valued, not anything more than that.
In NEC Semi-Conductors Ltd v IRC [2006] STC 606, para 173, Mummery LJ said that the question how restitutionary relief of the kind that is sought in this case should be assessed was not settled by La Pintada, as the claim is not for an entitlement to interest, as creditors, on a debt or on damages by way of compensation for loss of the use of the money that was unjustly demanded and retained by the defendant. I respectfully agree with him, and I would approach the issue in this case from the same starting point. I would hold that it is open to your Lordships to examine this issue on the basis that the answer to it is to be found in the law of unjust enrichment. It is not foreclosed by the decisions of this House in Westdeutsche [1996] AC 669 and La Pintada [1985] AC 104, neither of which addressed the issues that arise in this case.
The ECJ’s judgment
As Park J explained in the introduction to his judgment [2004] STC 1178, para 3, this case is about companies which, because they had to pay part of their mainstream corporation tax prematurely, suffered a timing disadvantage which conferred a corresponding timing advantage on the Revenue. We now know that the absence of the power to make group income elections in the case of these companies which resulted in the premature payment of corporation tax was contrary to article 52 of the EC Treaty (now article 43) which guarantees freedom of establishment: Metallgesellschaft Ltd v Inland Revenue Commissioners [2001] Ch 620. Community law requires that the companies must be provided with a remedy in domestic law which will enable them to recover a sum equal to the interest which would have been generated by the advance payments from the date of the payment of the ACT until the date on which the MCT became chargeable: para 88.
The European Court of Justice explained in para 87 of its judgment in Metallgesellschaft that the breach of Community law arose not from the payment of the tax itself but from its being levied prematurely. The purpose of the award of interest covering loss of the use of the sums paid by way of ACT is to restore the equal treatment in the levying of the tax which was guaranteed by article 52 of the Treaty. The expression “loss of use” suggests that what was primarily in contemplation was a remedy in damages. But the Court made it clear in para 81 of its judgment that it was not for it to assign a legal classification to the actions brought by the claimants in the national court to obtain this remedy:
“In the circumstances, it is for the claimants to specify the nature and basis of their actions (whether they are actions for restitution or actions for compensation for damage), subject to the supervision of the national court.”
In essence, the claim is for the time value of the money that was paid over prematurely. How that value is to be measured depends on the nature of the remedy.
In the concluding sentence of para 96 the Court recalled that, in the absence of Community rules, it is for the domestic legal system of the member state concerned to lay down the detailed procedural rules governing such actions, “including ancillary questions such as the payment of interest”. That sentence must be read in the light of what the Court said in para 87 of the judgment. The claim for payment of interest covering the loss of use over time of the sums paid by way of ACT is the very objective sought in the main proceedings. It is the principal sum claimed. We are not concerned in this case with the ancillary claim under the statute for simple interest. This is not a claim for discretionary interest on a sum for which judgment is given for the recovery of a debt or damages or which is paid before judgment. Sempra accepted that the ancillary award would be made under section 35A(1) of the 1981 Act once the principal sum has been identified.
The issues
The question then is whether the calculation of the award that is required by Community law in these circumstances should be effected on the basis of compound interest as the appellants contend, or of simple interest as is contended for by the Revenue. It should be appreciated that this is the only point of substance that requires to be decided in this case. Given the decision in Metallgesellschaft, the Revenue do not now dispute liability to pay interest on the amounts paid prematurely, appropriately calculated. Moreover, for reasons which I shall explain later, there is no challenge in principle to Sempra’s decision to seek to obtain this award in restitution rather than as damages.
As for the method of calculation, it was common ground before the judge that if compound interest was to be awarded it should be calculated on a conventional basis – the rate being derived from the rates of interest generally prevailing on ordinary commercial borrowings during the relevant period. But, for reasons that I shall mention later, it appears that the Revenue’s statement of its position was based on a misunderstanding. Mr Glick QC accepted that, if compound interest was to be used, the rate of interest on ordinary commercial borrowings would be appropriate for an award of damages. But he said that a different approach was needed if Sempra was to be allowed to recover compound interest as a restitutionary award on the ground of unjust enrichment measured by the time value of the money that was paid prematurely.
The Court of Justice was not asked to provide an answer to the question how the principal award was to be calculated. It is highly likely however that, if it had been asked to do so in Metallgesellschaft, it would have said that its assessment was a matter for the national court, and that it would have given the same answer to the question whether it was open to the claimants to choose between the two alternative remedies. This is already implicit in its comment in para 81 that it is for the claimants, subject to the supervision of the national court, to specify the nature and basis of their actions. I agree with my noble and learned friends Lord Nicholls of Birkenhead and Lord Walker of Gestingthorpe that it would serve no useful purpose to make a further reference to the Court in these circumstances. But it became increasingly plain in the course of the argument before your Lordships that the question as to how the interest is to be calculated cannot be answered without a clear understanding of the causes of action in domestic law which are being relied upon to produce the award.
The causes of action
These causes of action were identified only in the most general terms in the second question on which the Court of Justice was asked to give a preliminary ruling in that case. They were referred to as a restitutionary right to claim a sum of money by way of interest on the ACT or, in the alternative, as a sum claimed by way of an action for damages pursuant to Community law principles. The Court gave its answer on two assumptions: first, that the actions were to be treated as claims for restitution of a charge levied in breach of Community law: para 82; and secondly, that they were to be treated as claims for compensation for damage caused by breach of Community law: para 90. On the first assumption it said that in an action for restitution the principal sum due was none other than the amount of interest which would have been generated by the sum, use of which was lost as a result of the premature levy of the tax: para 88. On the second assumption it said that an award of interest was essential if the damage caused by the breach of article 52 of the Treaty was to be repaired: para 95.
A more precise analysis of these causes of action is now needed in view of the problems that the companies face in pursuing their claim under domestic limitation of actions rules. There is little that I would wish to add to what Lord Nicholls has said about the approach that should now be taken to claims at common law for damages for interest losses suffered as a result of the late payment of money. In my opinion a decision on this point is not essential to the resolution of the question which is at issue in this case, as the cause of action with which we are concerned here is different. But I agree with him that the House should take the opportunity of departing from Lord Brandon of Oakbrook’s analysis in President of India v La Pintada Compania Navigation SA [1985] 1 AC 104 and that it should hold that at common law, subject to the ordinary rules of remoteness which apply to all claims of damages, the loss suffered as a result of the late payment of money is recoverable. This is already the law where the claim is for a debt incurred by a building contractor to raise the necessary capital which has interest charges as one of its constituents: see F G Minter v Welsh Health Technical Services Organisation (1980) 13 Build LR 1, CA, 23, per Ackner LJ; Rees and Kirby Ltd v Swansea City Council (1985) 30 Build LR 1, CA; see also Margrie Holdings Ltd v City of Edinburgh District Council, 1994 SC 1, 10-11. The reality is that every creditor who is deprived of funds to which he is entitled and which he needs to run his business will have to incur an interest-bearing loan or employ other funds which could themselves have earned interest. It is a short step to say that interest losses will arise “in the ordinary course of things” in such circumstances.
I also agree with Lord Nicholls that the loss on the late payment of a debt may include an element of compound interest. But the claimant must claim and prove his actual interest losses if he wishes to recover compound interest, as is the case where the claim is for a sum which includes interest charges. The claimant would have to show, if his claim is for ancillary interest, that his actual losses were more than he would recover by way of interest under the statute. In practice, especially where the period over which interest is sought is short or where the claimant does not have to borrow money to replace the debt, simple interest under section 35A of the Supreme Court Act 1981 is likely to be the more convenient remedy.
I wish to concentrate on the approach that should be taken to the restitutionary cause of action on which Sempra prefers and is entitled to rely, which is its claim that the money was paid under a mistake. The conclusion that the court has jurisdiction to award compound interest as damages at common law is, however, a valuable one. It provides us with a building block which was missing when the House rejected the use of compound interest as a possible solution in equity in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669. Ancillary interest was sought on a sum for which the court was to give judgment in satisfaction of the council’s restitutionary claim against the bank. It was common ground that there was no jurisdiction to award compound interest in such a case at common law or by statute: per Lord Goff of Chieveley, p 690H.
The restitutionary claim
Four sample payments of ACT have been agreed upon for the purposes of this test case all of which were, sooner or later, set off against MCT. The earliest ACT payment was made on 12 October 1981, and the latest was made on 18 July 1994. The longest interval was almost ten years, and the shortest was just under one year. Tax paid in response to an unlawful demand is recoverable under the Woolwich principle: Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70. But the limitation period of six years which applies to unlawful demands runs from the date of payment. Sempra wish to take advantage of the extended limitation period that is available under section 32(1)(c) of the Limitation Act 1980. It provides that, where the action is for relief from the consequences of a mistake, the period of limitation shall not begin to run until the claimant has discovered the mistake or could with reasonable diligence have discovered it. As Park J observed in para 11 of his judgment, one of the bases on which Sempra’s claim is pleaded is for restitution by reason of the ACT having been paid under a mistake of law. The effect of your Lordships’ decision in Deutsche Morgan Grenfell Group plc v IRC [2007] 1 AC 558 is that it is open to Sempra to base its claim on this ground, as the longer limitation period is in its best interests: see para 51. If this is done, the claim for interest on none of the sample payments will be statute-barred.
It appears to have been assumed until the proceedings reached this House that the choice of claim is immaterial to the way in which the principal sum is to be calculated. But the observation by the Court of Justice in para 88 of its judgment that the principal sum due is none other than the amount of interest which would have been generated by the sum the use of which was lost as a result of the premature levy of the tax invites the question whether an award on this basis is available in domestic law as a restitutionary remedy. Park J referred to this passage in para 16(ii) of his judgment, after noting in para 16(i) that Sempra had formulated its claims in both ways in the alternative. He then added this comment in para 16(iii), after referring to the Court’s observation in para 89 of its judgment that the sum which may be claimed by way of restitution was the interest accrued on the ACT between its payment and the date on which the MCT became payable:
“Mr Glick commented in argument, and I agree, that, on the basis of the judgment, a restitutionary remedy and a compensatory remedy would both produce the same result, since both of them look to the same thing: what the taxpaying company has lost by reason of having to pay tax early, not what the government has gained.”
The Court of Justice seems to have assumed that the basis of the award would be the same irrespective of the choice of remedy. This appears at that stage to have been common ground. But the arguments that were developed before your Lordships have shown that this assumption is no longer sustainable.
There is no doubt that a compensatory remedy for breach of Community law would look to what the taxpaying company had lost by reason of having to pay the tax early. But that, from Sempra’s point of view, is not the preferred remedy. If it is to escape from the six year limitation period it must instead pursue the alternative argument that the payments were made under a mistake. This is a restitutionary remedy. So it is necessary to look more closely at the nature of this remedy, and at the basis on which a claim under it falls to be calculated. It is only when this question has been addressed and answered that it will be possible to answer with confidence the question how, if Sempra is to be provided with the restitutionary remedy to which it is entitled for its mistake as to its rights under Community law, the amount of the principal sum due must be calculated.
In Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, 372G-373B Lord Goff of Chieveley referred to the development of a coherent law of restitution, a doctrine first recognised by this House in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 577-578. He said there was a general right of recovery of money paid under a mistake and that it was founded upon the principle of unjust enrichment. At p 373C he said that a blanket rule of non-recovery on the ground of a mistake of law could not survive in a rubric of the law based on that principle. This led him to conclude that there was “a general right” to recover money paid under a mistake, whether of fact or law, subject to the defences available in the law of restitution: p 375H. At p 377C he said that the common law should now recognise that restitution may be granted in respect of money paid under a mistake of law. At p 379H he said that, subject to any applicable defences, the payer was “entitled” to recover the money paid under a mistake. Throughout his speech he was addressing a common law remedy, not one that was available in equity. I think that it can now be taken as settled that, under the Kleinwort Benson principle, a cause of action at common law is available for money paid under a mistake of law: Deutsche Morgan Grenfell Group plc v IRC [2007] 1 AC 558, para 62. I also think that the time has come to recognise that the court has jurisdiction at common law to award compound interest where the claimant seeks a restitutionary remedy for the time value of money paid under a mistake.
Recognition that restitution is a common law remedy raises questions about the limits that must be set to it which would not arise if it was available only in equity. The enrichment must, of course, have been “unjust”. Andrew Burrows, The Law of Restitution, 2nd ed (2002) pp 48-50 has argued that the claimant must identify positive reasons for restitution if he is to be entitled to this remedy: see also my own observations in Kleinwort Benson, pp 408C-409D. It has been suggested, from the civilian perspective, that the underlying principle is the absence of a legal ground to justify retention of the benefit: Shilliday v Smith, 1998 SC 725, 727per Lord President Rodger; Jacques Du Plessis, “Towards a Rational Structure of Liability for Unjustified Enrichment: Thoughts from two Mixed Jurisdictions”, 122 South African Law Journal 142, pp154, 180-181. In Kleinwort Benson [1999] 2 AC 349 Lord Goff also accepted that the common law, having recognised the right to recover money paid under a mistake of law, must identify particular sets of circumstances in which, as a matter of principle or policy and to protect the stability of closed transaction, recovery should not be allowed: pp 382G-H, 385C-D.
In Kleinwort Benson, at p 382G-H, Lord Goff gave three examples of the circumstances that he had in mind: defence of change of position, the defence of compromise and the defence of settlement of an honest claim, adding that the scope of the last was a matter of debate. This was not, and was not intended to be, an exhaustive list. He said that it was possible that other defences might be developed from judicial decisions in the future. A valuable review of the defences that may be available in Scots law is to be found in Robin Evans-Jones, Unjustified Enrichment, Vol 1, Chapter Ten. As he explains in para 10.01, the relationship between a claim and a defence in the law of unjustified enrichment is to be found in Lord Kyllachy’s observation in Credit Lyonnais v George Stevenson & Co Ltd (1901) 9 SLT 93, 95:
“The money in question was paid in error under a mistake of fact. It was therefore reclaimable, unless (the pursuer’s remedy being equitable) there was an equitable defence to repetition.”
The use of the word “equitable” in this context must, of course, be understood in the light of the fact that in Scotland equitable principles are part of the common law. But it shows that, in principle, the right of recovery must be accompanied by appropriate defences to prevent unfairness. Protecting the stability of closed transactions is the paradigm case for such a defence.
There is no need to pursue these arguments any further in this case. The question whether there is an unjust factor has already been settled. As the European Court of Justice has explained, there was no legal ground for the retention of the enrichment. The unjust enrichment principle supports the free-standing cause of action to recover interest, which is the measure of the enrichment. It has not been suggested that a restitutionary award by way of interest would give rise to injustice, so long as it was appropriately calculated.
The claim in Kleinwort Benson [1999] 2 AC 349 was for recovery of the money that had been paid to the local authorities outside the six-year limitation period. It was not necessary to explore how the restitutionary remedy was to be calculated, as there was no issue as to the amounts that were recoverable. The principal sums due were the same, whether the measure of the remedy was the amount by which the local authorities had been enriched or the amount of the Bank’s loss. But Lord Goff went much further in his explanation of what he referred to as a coherent law of restitution at common law than he felt able to do in Westdeutsche Landesbank (see [1996] AC 669, 686A-B). His speech in Kleinwort Benson provides us with another vital building block. Recognition that the court has jurisdiction to award compound interest at common law is a short, but logical, step in the further development of the restitutionary remedy. It follows from the fact that the right to recover money paid under a mistake is available at common law To treat the choice of remedy in unjust enrichment as discretionary would, in my opinion, be inconsistent with the common law right that gives rise to it.
The basis of the award
I turn then to the basis on which the restitutionary award should be calculated. In Shilliday v Smith 1998 SC 725, 727 Lord President Rodger said that anyone who wants to glimpse something of the underlying realities in the law of unjust enrichment must start from the work of Professor Peter Birks. In the essay which he contributed to Restitution, Past, Present and Future, Essays in Honour of Gareth Jones (1998), Misnomer, p 1, Professor Birks said that the whole thrust of the law of restitution is towards defining and analysing the event which most commonly brings it about, which is unjust enrichment. Restitution is the response to unjust enrichment, and unjust enrichment is the event which triggers the response. The name of the event ought to predominate over the response. So, he argued, the subject ought to be called unjust enrichment. That is the starting point and, because the concept is one of enrichment not of damages, it determines the nature of the response.
In his introduction to the book which he called Unjust Enrichment (2nd edition, 2005) pp 3-4, he drew attention to another terminological difficulty. He explained that the law of restitution is the law of gain-based recovery, just as the law of compensation is the law of loss-based recovery:
“Thus a right to restitution is a right to a gain received by the defendant, while a right to compensation is a right that the defendant make good a loss suffered by the claimant. The word ‘restitution’ is not entirely happy in this partnership with ‘compensation’. It has had to be manoeuvred into that role. ‘Disgorgement’, which has no legal pedigree, might be said to fit the job more easily and more exactly.”
So the remedy of restitution differs from that of damages. It is the gain that needs to be measured, not the loss to the claimant. The gain needs to be reversed if the claimant is to make good his remedy.
Professor Birks then subjected the law of unjust enrichment to a five question analysis – an exercise that he had been conducting ever since he began his discussion of the subject in “Six Questions in Search of a Subject: Unjust Enrichment in a Crisis of Identity” 1985 JR 227. As his fourth question he asked what kind of right it is that the claimant acquires: p 163. He said that the choice always lies between a right in personam (a personal right) and a right in rem (a property right). As to the content of the right in personam, which is the relevant right in the context of Sempra’s claim against the Revenue, he repeated that the right in personam which arises from unjust enrichment is a right to restitution: pp 167-168. This, as he explained, is a right that the enrichee give up his gain. Elaborating on this point, he said that in the context of unjust enrichment the everyday meaning of “restitution” is stretched so that it reaches all givings up, with no hint of a restriction on giving back. His reference to “givings up” requires further analysis. But there is no suggestion here that, once it is established that the enrichment was unjust, calculation of the remedy that this gives rise to is discretionary.
The question then is whether the claimant in unjust enrichment must nevertheless have suffered a loss corresponding to the defendant’s enrichment. In Unjust Enrichment 2nd ed, pp 167-168, Professor Birks said that there was no need for this to be the measure of the enrichment:
“By insisting, artificially but firmly, on an enlargement of the everyday sense of ‘restitution’ we avoid being accidentally trapped by the choice of a word into believing that the answer must be yes. If ‘restitution’ meant ‘giving back’, no other answer would be possible. The larger meaning leaves the matter open. An alternative strategy to the same effect would be to switch from ‘restitution’ to ‘disgorgement’, which has no restrictive overtone.”
I would apply the reasoning in these passages to the claim for interest in this case. A remedy in unjust enrichment is not claim of damages. Nor is it a contractual remedy, so there is no need to search for an express or an implied term as the basis for recovery. The old rules which inhibited awards of interest to ancillary interest on sums due on contractual debts or on claims for money had and received do not apply. The essence of the claim is that the Revenue was unjustly enriched because Sempra paid the tax when it did in the mistaken belief that it was obliged to do so when in fact it was being levied prematurely. So the Revenue must give back to Sempra the whole of the benefit of the enrichment which it obtained. The process is one of subtraction, not compensation.
But Professor Birk’s use of the word “disgorgement” is controversial, and it is misleading when applied to the facts of this case. Steven Elliott makes this point when he says, in the context of the equitable jurisdiction, that disgorgement interest is calculated to strip profits the fiduciary has made through the use of trust property: “Rethinking Interest on Withheld and Misapplied Trust Money” [2001] 65 Conv 313, 316. Mr Rabinowitz QC said that Sempra was seeking restitution, not disgorgement. Disgorgement would be appropriate if the claimant was seeking to recover the actual profits that the defendant had made as a result of the enrichment. But Sempra does not ask for an account of profits, nor does it invite the court to look at the use, if any, to which the money was actually put by the Revenue. Furthermore it is accepted that the claim is personal, not a proprietary one. But, as in cases of property other than money where the claim includes restitution for the value of the use of the asset that was transferred, subtraction of the enrichment from the defendant includes more than the return of the money that was transferred at its nominal or face value. That value, in this case, has already been accounted for. The subject matter of Sempra’s claim is the time value of the enrichment. This is the amount that has to be assessed.
In this case the enrichment consists, not of the payment of a sum of money as such, but of its payment prematurely. As Professor Birks pointed out, the availability of money to use is not unequivocally enriching in the same degree as the receipt of money: Unjust Enrichment, 2nd ed, p 53. But money has a value, and in my opinion the measure of the right to subtraction of the enrichment that resulted from its receipt does not depend on proof by Sempra of what the Revenue actually did with it. It was the opportunity to turn the money to account during the period of the enrichment that passed from Sempra to the Revenue. This is the benefit which the defendant is presumed to have derived from money in its hands, as Lord Walker puts it in para 180. The Revenue accepts that the money it received prematurely had a value, but it says that the restitutionary award should take the form of simple interest. I do not think that such an award would be consistent with principle. Simple interest is an artificial construct which has no relation to the way money is obtained or turned to account in the real world. It is an imperfect way of measuring the time value of what was received prematurely. Restitution requires that the entirety of the time value of the money that was paid prematurely be transferred back to Sempra by the Revenue.
All this points to the conclusion, subject to what I say later about onus (see paras 47, 48) that, for restitution to be given for the time value of the money which was paid prematurely, the principal sum to be awarded in this case should be calculated on the basis of compound interest.
I recognise, of course, that in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 this House held that in a claim at common law for money had and received the claimant was entitled only to simple interest under section 35A of the Supreme Court Act 1981 and, by a majority, that it would not be appropriate for equity to award compound interest on the principal sum in aid of the bank’s common law claim. As my noble and learned friend Lord Mance points out in his analysis of that case, the argument throughout was that there was no power at common law to award compound interest. But I agree with Lord Nicholls and with my noble and learned friend Lord Scott of Foscote that Sempra’s restitutionary claim is available to it at common law. Once it is accepted that losses caused by late payment are recoverable under the restitutionary remedy at common law irrespective of the position in equity, the problem that was addressed in Westdeutche disappears.
Furthermore the interest in question in the present case is, as the Court of Justice [2001] Ch 620 stressed in para 88 of its judgment, the principal sum itself. In my opinion the decision in Westdeutsche does not address this point. We were not asked to overrule that decision, because it is distinguishable on this ground. Furthermore, the basis of Sempra’s claim, as the common law has now recognised, is unjust enrichment. I do not think that it is open to the common law, when it is providing a remedy in unjust enrichment, to decline to apply the principle on which that remedy is founded when the principal sum to be awarded is being calculated. As Lord Nicholls points out (see para 99), there is now ample authority to the effect that interest losses which are recoverable as damages should be calculated on a compound basis where the evidence shows that this is appropriate. The same rule should be applied to the restitutionary remedy at common law.
Compound interest in the EU
It appears that the practice in a majority of states in the EU is to award simple interest ancillary to a principal sum that is to be paid by way of damages – the main exceptions being Poland and the Netherlands, and Germany where compound interest may be claimed as part of the damages: Ashurst, “Study on the conditions of claims for damages in case on infringement of EC Competition rules” (2004), p 87. In Corus UK Ltd v Commission of the European Communities (Case T-171/99) [2002] 1 WLR 970, para 60, the Court of First Instance said that, according to the principle generally accepted in the domestic law of the Member States, the amount recoverable for loss consisting of the loss of use of money over a period of time is generally calculated by reference to the statutory or judicial rate of interest, without compounding. But there is now ample evidence that it is the practice of the Commission to redress the advantage which the recipient of money has obtained contrary to EU rules by requiring that interest to be paid on that money is compounded at commercial rates.
Article 14 of Council Regulation (EC) No 659/1999 of 22 March 1999 (OJ 1999, L83, p1), laying down detailed rules for the application of article 93 of the EC Treaty (now article 88 EC), provides that, when negative decisions are taken in cases of unlawful aid, the aid to be recovered is to include interest at an appropriate rate fixed by the Commission. In its communication on the interest rates to be applied when aid granted unlawfully is being recovered (2003/C 110/08; OJ 203 C110, p 21) the Commission referred to its letter to Member States of 22 February 1995 in which it said that, for the purpose of restoring the status quo, compound interest at commercial rates provided a better measure of the advantage improperly conferred on the recipient of unlawful aid, and that for many years it had been its standard practice to include in its recovery decisions a clause requiring interest to be calculated on this basis.
In para 14 of the preamble to Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty (OJ 2004 L140, p 2) the Commission stated:
“Given the objective of restoring the situation existing before the aid was unlawfully granted, and in accordance with general financial practice, the recovery interest rate to be fixed by the Commission should be annually compounded.”
In an action brought on 2 August 2004 by the Commission against the French Republic (Case C-337/04; OJ 2004 C239, p 9) in which it claimed that the French Republic had failed to fulfil its obligations in relation to state aid, the Commission said that it did not agree that the simple interest method used by the French authorities to calculate interest to be paid on the amount to be recovered was the right method:
“It considers that only capitalisation of interest by the compound interest method will result in the neutralisation of the economic advantage from which Crédit Mutuel has benefited.”
The choice of method to be used in this case is, of course, a matter for the national court applying domestic law. But it is reassuring, although hardly surprising, to find that the compound interest method is the Commission’s method of choice in the field of Community law in not dissimilar circumstances. The claim for interest in this case may be regarded as a fortiori of these examples. It is not ancillary to a principal sum for which recovery is being ordered. It is the principal sum that is recoverable for the time value of the sums that were paid prematurely.
Compound interest in domestic law
The fundamental point, however, is this. Compound interest is a necessary, and very familiar, fact of commercial life. As the Law Commission said in its Consultation Paper on “Compound Interest” (2002, No 167), para 4.1, the obvious reason for awarding compound interest is that it reflects economic reality. In its “Discussion Paper on Interest on Debt and Damages” (No 127, 2005), para 8.18 the Scottish Law Commission said that it endorsed the view of the Law Society of England and Wales in their response to the Law Commission’s Consultation Paper that “simple interest never provides a full indemnity for the loss to the litigant.” In para 8.38 the Scottish Law Commission said, having examined the arguments either way, that it was inclined to the view that the case against the compounding of interest was essentially a case against interest itself. Computation of the time value of the enrichment on the basis of simple interest will inevitably fall short of its true value. Such a result would conflict with the principle that applies in unjust enrichment cases, that the enrichee must give up to the claimant the enrichment with, as Professor Birks put it in Unjust Enrichment (2nd ed), p 167, no hint of a restriction to giving back. In my opinion the compounding of interest is the basis on which the restitutionary award in this case should be calculated.
Measurement
The virtue of simple interest is its simplicity. That cannot be said of compound interest, which can be calculated in different ways leading to different results. This creates the potential for dispute, which is one of the more important objections to its use generally. Hence the Law Commission’s recommendation that, if a power to award compound interest were to be introduced, the Civil Procedure Rule Committee should have power to provide the courts with guidance on when to award compound interest: “Pre-Judgment Interest on Debts and Damages” (Law Com No 287), para 5.38. The evidence for the Revenue in this case was that the nature of the financial relationship between the Government and the Bank of England was such that it was impossible to measure the amount of the interest earned or saved by the Revenue, or by the government generally, on the ACT payments that were made by Sempra. The effect of its evidence was that it was wrong to assume that the Government invested the payments that it received on the basis that it would receive a compound return for it in the commercial market. But the judge did not, in the event, have to resolve this issue. It was common ground before him that if compound interest was to be awarded it should be calculated on a conventional basis – the rate being derived from the rates of interest generally prevailing on borrowings during the relevant period.
Mr Glick accepted during the first hearing of this appeal that there was no challenge to the judge’s adoption of the idea that a conventional approach should be adopted to the calculation of compound interest. He explained that this was on the assumption that it was not being suggested that the basis of the claim was what the Crown achieved by way of a return on the premature payments. He accepted that a conventional rate should be adopted because Sempra’s position was understood to be that the amount of the award would be the same whether it was for restitution or for damages. This too was the position as it was understood to be by Park J: [2004] STC 1178, para 19. His order of 16 June 2004 states, in para 3, that the interest rate or rates to be used for the calculation of interest during the premature tax period should be a conventional rate or rates. Your Lordships sought further clarification of the Revenue’s position on this point, among others that arose out of the way the case was argued at the first hearing. In the light of the written submissions that were received, the case was put out for further oral argument.
At the further hearing Mr Rabinowitz submitted that the Revenue should be held to the concession that had been made on this issue on its behalf in the courts below and in this House. Mr Glick said that a different approach was needed if Sempra were to be allowed to recover compound interest as a restitutionary award for the time value of the money while it was in the hands of the Revenue. He submitted that, if a conventional rate of interest was to be used because of the difficulty of establishing the amount of the Government’s benefit, it should be arrived at by reference to the rate at which the Government could have borrowed money during the relevant period – by the issue of Treasury Bills, for example.
The formula that was agreed for the award of compound interest was intended to be the same for all claimants in the GLOs. This was that the interest should be calculated without reference to the particular circumstances of the parties. It was to be fixed conventionally at the generally prevailing rates of interest which lenders were able to obtain commercially. As Mr Rabinowitz puts it, the measure is the reasonable price that would have to be paid to borrow the money. There is an obvious advantage to be gained by adopting a formula that will apply to all these cases and avoid the leading and analysis of complex evidence. But the concession that the cost of borrowing should be adopted was made before Sempra’ argument was refined in this House in the course of argument. It is no longer obvious that an approach which looks only to the rates of interest which lenders are able to obtain commercially fits the unusual facts of this case. I would hold that justice requires that Mr Glick should be allowed to withdraw his concession. His suggestion that in this case the conventional rate should be arrived at by reference to the rate of Government borrowing is attractive. But questions of this kind are normally approached objectively by reference to what a reasonable person would pay for the benefit that is in question: Attorney General v Blake [2001] 1 AC 268, 278 F-G. Bearing this in mind, can Mr Glick’s subjective approach be justified in principle?
As Lord Goff said in Lipkin Gorman v Karpnale [1991] 2 AC 548, 578C-E, and stressed again in Kleinwort Benson [1999] 2 AC 349, 385A-F, the recovery of money in restitution is not, as a general rule, a matter for the discretion of the court. A claim to recover money at common law is a matter of right. But the enrichment has to be measured, even in cases such as this where it is impracticable to identify the amount of the benefit obtained by the enrichee. The basis of the restitutionary right is the unjust enrichment principle. This suggests that, if a conventional rate of interest is to be adopted, it should be one which is appropriate to the enrichee’s circumstances. In Scots law, the claim to recover an unjustified enrichment is regarded by the common law as an equitable one: Morgan Guaranty Trust Co of New York v Lothian Regional Council, 1995 SC 151, 155E-G, 166B. In Scotland, from the earliest times, the law has been permeated by equity: John W Cairns, “Historical Introduction” in A History of the Private Law of Scotland, eds Reid and Zimmermann (2000), vol 1, pp 98, 138. So the court, applying equitable principles, may take into account a whole range of circumstances: see Robin Evans-Jones, Unjustified Enrichment, Vol 1, para 9.54. I do not see why, although the claim in English law is a matter of right at common law, the enrichment principle on which it is based should not lead to the same result when an English court is measuring what needs to be reversed by it. This would require no more than a small step forward to assimilate the common law with equity and create, at least to this extent, a unified remedy: see Andrew Burrows, “We Do This At Common Law But That In Equity” (2002) 22 Oxford Journal of Legal Studies, 1, 15.
A further question as to the measure of loss has been raised by my noble and learned friend Lord Mance (para 233). Why, he asks, should there be an onus on the recipient to displace a conventional or objective measure? The basic test of recovery should be, he suggests, to look to actual benefit. Otherwise the effect would be incorrectly to reverse the onus. Your Lordships did not hear argument on the question of onus, and it has received little attention in the authorities. But in Morgan Guaranty Trust Company of New York v Lothian Regional Council, 1995 SC 151, 165 I said that, once the pursuer has averred the necessary ingredients to show that prima facie he is entitled to the remedy, it is for the defender to raise the issues which may lead to a decision that the remedy should be refused on grounds of equity. This approach was based on the principle that a party ought not be required to produce proof of matters that are unlikely to be within his own knowledge.
That observation was, of course, made in the context of a legal system whose common law principles are informed by equity. But I think that it is capable of being applied here too. Once the claimant has shown that prima facie he is entitled to a restitutionary remedy, direct knowledge of the extent of the benefit, if any, that has been received can be assumed to lie with the recipient. It is open to the recipient to demonstrate that there was no actual enrichment when the money fell into his hands notwithstanding the opportunity to turn it to account. But the case for the Revenue was not that it did not use the money at all. On the contrary, its evidence was that, because of the nature of the financial relationship between the Government and the Bank of England, it was impossible to measure the amount of interest earned or saved by it, or by the Government generally, on the sample ACT payments paid by Sempra. It was not that there was no actual benefit, but that the benefit was extremely difficult to quantify. It seems to me that, on this evidence, the assumption that the Revenue derived some benefit from the receipt of the money prematurely has not been displaced, and that this justifies resort to a conventional rate of interest as the measure of that benefit.
The proposition that a conventional rate should be used leaves open for further discussion questions of detail such as how that rate is to be arrived at and what rests should be adopted. The enrichment principle indicates that these questions should be resolved by looking at the circumstances of the enrichee. The use of ordinary commercial rates of interest, at ordinary rests, would be appropriate if those rates were relevant to the enrichee’s circumstances. But I would hold that it is open to the enrichee to show that it would have been able to borrow money at rates or on terms more favourable to it than those available in the ordinary commercial market. If it can do that, then ordinary rates and other terms must give way to those that are relevant to the circumstances of the enrichee. The unusual position of the Revenue has been sufficiently demonstrated. It seems to me that Mr Glick’s suggestion is in accordance with principle, and I would adopt it.
Conclusion
For these reasons I agree with Lord Nicholls and Lord Walker that Sempra’s claim for restitution ought to be measured by an award of compound interest at conventional rates calculated by reference to the rates of interest and other terms applicable to borrowing by the Government in the market during the relevant period. I would vary para 3 of the judge’s order to that effect. I would delete para 2 of the Court of Appeal’s order because the assumption on which it was based, that ordinary commercial rates of interest would be used, is being departed from. Otherwise I would dismiss the appeal.
LORD NICHOLLS OF BIRKENHEAD
My Lords,
Legal rules which are not soundly based resemble proverbial bad pennies: they turn up again and again. The unsound rule returning once more for consideration by your Lordships’ House concerns the negative attitude of English law to awards of compound interest on claims for debts paid late.
We live in a world where interest payments for the use of money are calculated on a compound basis. Money is not available commercially on simple interest terms. This is the daily experience of everyone, whether borrowing money on overdrafts or credit cards or mortgages or shopping around for the best rates when depositing savings with banks or building societies. If the law is to achieve a fair and just outcome when assessing financial loss it must recognise and give effect to this reality.
Unhappily this is still not altogether so. To a significant extent the law remains out-of-step with everyday life in the 21st century. In the first half of the 19th century the common law adopted a restrictive rule: unpaid debts do not carry interest, either compound or simple. This was an exception to the ordinary common law principles applicable to recovery of damages for breach of contract.
Since then successive statutes have made general provision for courts to award interest in many instances. This provision is limited to simple interest. The statutes make no provision for compound interest.
In 1984 your Lordships’ House curtailed the scope of the restrictive common law rule. Despite this, by common accord the current position is not yet coherent or satisfactory. So your Lordships are being called upon to consider the implications of this restrictive rule once more. Your Lordships have to consider how far the common law should still abide in a world where present-day economic reality is not allowed to intrude.
Advance corporation tax and the EC Treaty
The context in which the question of compound interest arises on this appeal is a claim by a taxpayer company Sempra Metals Ltd (‘Sempra’) for compensation in respect of the United Kingdom’s breach of article 52, now article 43, of the EC Treaty. In 2001 the Court of Justice of the European Communities (‘the ECJ’) decided that one aspect of this country’s advance corporation tax regime, as it was in force until 1999, contravened article 52. The offending statutory provisions concerned group income elections. These were contained latterly in section 247 of the Income and Corporation Taxes Act 1988 (‘ICTA’) as it stood until April 1999.
In short, from 1973 until 1999 a company was liable to pay advance corporation tax (‘ACT’) on the amount of its dividends. ACT could be set off against the company’s liability to corporation tax on its profits, colloquially known as its mainstream corporation tax liability, when it fell due: see sections 14(1) and 239 of ICTA. In practice there was always an interval of at least eight months between any payment of ACT and a subsequent set off against mainstream corporation tax.
Section 247 enabled parent companies and subsidiary companies jointly to make an election having the effect of excluding dividends paid by a subsidiary to its parent from the obligation to pay ACT. This option, however, was available only when the parent company and its subsidiary were resident in the United Kingdom. A group income election, as it was known, was not available if the parent company was resident outside the United Kingdom. The ECJ held this provision contravened parent companies’ freedom of establishment, contrary to article 52 of the Treaty: see Metallgesellschaft Ltd v Inland Revenue Commissioners and Hoechst AG v Inland Revenue Commissioners (Joined cases C-397 and 410/98) [2001] Ch 620. Metallgesellschaft was the previous name of Sempra, the respondent to the present appeal.
In its decision the ECJ considered the remedial consequences of this contravention of the Treaty. The court observed that in the ordinary course it is for national law to settle ancillary questions relating to the reimbursement of charges improperly levied, such as the payment of interest, including the rate of interest (paragraph 86). But in the present cases the claim for payment of interest covering the loss of use of the money paid by way of ACT was not ancillary. It was the very objective sought by the claimants. Where the breach of Community law arises, not from payment of the tax itself, but from its being levied prematurely, the award of interest represents the reimbursement of what was improperly paid. An award of interest is ‘essential’ in restoring the equal treatment guaranteed by article 52 (paragraph 87).
The court declined to discuss the form of remedial proceedings in a national court. That was a matter for claimants, subject to the supervision of the national court. But the court did make brief observations on the two forms of remedial proceedings ventilated before it. In an action for restitution, the principal sum due is none other than the amount of interest which would have been generated by the sum whose use was lost as a result of the premature levy of the tax (paragraph 88). In a claim for compensation for damage caused by the breach of Community law, the interest available to the claimants had it not been for the inequality of treatment ‘constitutes the essential component’ of their Community right (paragraph 93). The award of interest ‘would therefore seem to be essential’ if the damage caused by the breach of article 52 was to be repaired (paragraph 95).
Accordingly, in answer to a second question, the ECJ gave guidance to the following effect. Where subsidiary companies have been obliged to pay ACT in respect of dividends paid to their non-resident parents when liability to pay ACT would have been avoided had the parent companies been resident in the United Kingdom, article 52 requires that the resident subsidiary companies and the non-resident parent companies should have ‘an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they have sustained and from which the authorities of the member state concerned have benefited as a result of the advance payment of tax by the subsidiaries’ (paragraph 96). The court continued:
‘The mere fact that the sole object of such an action is the payment of interest equivalent to the financial loss suffered as a result of the loss of use of the sums paid prematurely does not constitute a ground for dismissing such an action. While, in the absence of Community rules, it is for the domestic legal system of the member state concerned to lay down the detailed procedural rules governing such actions, including ancillary questions such as the payment of interest, those rules must not render practically impossible or excessively difficult the exercise of rights conferred by Community law.’
The present case
The present case is a test claim under a group litigation order made to manage the numerous claims brought against the Inland Revenue as a result of the Hoechst decision. Sempra traded, as a principal and as a broker for clients, in metals listed on the London Metal Exchange. Sempra is resident in the United Kingdom. Its parent company is resident in Germany. Sempra’s claims are founded on the amounts of ACT paid in respect of four sample dividends Sempra paid to its parent company. The dividend payments comprised £2.5million paid in July and September 1981; £2million in January 1985; £1.8million in April 1989; and £21million in May 1994.
In very round figures, for the exact amounts are not material on this appeal, Sempra paid ACT in respect of these dividends as follows: £1.07million in October 1981; £809,000 in April 1985; £369,000 in July 1989; and £3.23million in July 1994. All these ACT payments were subsequently set off against Sempra’s mainstream corporation tax. The intervals between the payment of ACT and the time of set off varied considerably. The shortest period was just under one year, the longest almost ten years. Of the ACT totalling £1.07million paid in October 1981, £812,000 was not utilised until July 1991. With the exception of £1.56million utilised in July 1996, in each case the set off occurred before the issue of the writ in these proceedings.
For completeness I should add that this appeal proceeds on the basis that Sempra and its parent company would have made a group income election had this not been precluded by the UK residence requirements of section 247 ICTA.
At first instance Park J decided that the compensation due to Sempra should be calculated on a compound basis: [2004] STC 1178. The Court of Appeal, comprising Chadwick, Laws and Jonathan Parker LJJ, dismissed an appeal by the Inland Revenue: [2005] STC 687. The Court of Appeal made clear that interest should be computed by compounding at the same periodic rests as those by reference to which the applicable rate of interest is fixed. The Inland Revenue has now appealed to your Lordships’ House.
Compound interest and Community law
The detriment suffered by a taxpayer by the premature payment of tax is loss of use of the money for the period of prematurity. So if a taxpayer had to borrow the money, and his claim is for damages, his loss comprises the cost of borrowing the money for the period of prematurity. Alternatively, if the taxpayer’s reparation claim is framed in restitution, the Inland Revenue’s unjust enrichment comprises the benefit of having use of the money for the period of prematurity. Either way the essence of the taxpayer’s claim is for an amount of money by way of interest in respect of the tax paid prematurely.
The Hoechst decision makes plain that domestic law cannot exclude payment of interest in such cases. But, if not explicit, it is plainly implicit in the ECJ’s answer to the second question read in the context of the judgment as a whole that assessment of the amount of interest is a matter for the member state concerned, provided always the member state’s rules satisfy the principles of equivalence and effectiveness. The member state’s rules must be not less favourable than those governing the same or analogous domestic proceedings, and they must not render practically impossible or excessively difficult the exercise of the rights conferred by Community law.
A primary factor governing the amount of interest payable on a debt is the rate of interest. This, par excellence, is a matter for national law: see paragraph 86 of the Hoechst judgment, already noted. Another factor is whether the interest is simple or compound and, if compound, the intervals between the compounding dates. The rate of interest being a matter for national law, it would be very odd if the choice between simple and compound interest were not also a matter for national law. To my mind it is clear from the Hoechst decision that, even in the context of the present type of case, this choice is a matter for national law: provided always that national law satisfies the requirements of the twin principles of equivalence and effectiveness.
In the present case there is no difficulty or dispute about the principle of equivalence. The rights conferred on citizens in the United Kingdom by article 43, previously article 52, of the EC Treaty are rights falling within section 2(1) of the European Communities Act 1972. They are rights to which effect must be given in this country without further enactment. Accordingly a breach of the article 43 prohibition is characterised in English law as breach of a statutory duty: see the well-known analysis of Lord Diplock in Garden Cottage Foods Ltd v Milk Marketing Board [1984] 1 AC 130, 141.
The Inland Revenue accepts that, in addition to this primary claim in tort, Sempra has an alternative claim for restitutionary relief on two grounds: tax paid pursuant to an unlawful demand, and payments made under a mistake of law. The first of these two grounds is based on Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70, the second on Deutsche Morgan Grenfell Group Plc v Inland Revenue Commissioners [2007] 1 AC 558.
Sempra accepts that these three causes of action satisfy the Community law requirement of equivalence. Issue has been joined on the effectiveness of these domestic remedies.
As already foreshadowed, the crux of the dispute on effectiveness concerns the availability of compound interest in respect of the wrongful levying of ACT. The Inland Revenue recognises that interest is payable in respect of the tax paid prematurely in the form of ACT. But it contends that under English law the courts do not have power to award compound interest save in cases of fraud and misapplication by a fiduciary. The Revenue contends, further, that an award of simple interest would be an effective legal remedy for Sempra in the present case.
So I turn to consider the provision English law makes for the payment of interest in respect of the three causes of action relied upon by Sempra. I shall then consider whether this remedial provision satisfies the Community law principle of effectiveness.
Interest losses and damages
I start with the broad proposition of English law that as a general rule a claimant can recover damages for losses caused by a breach of contract or a tort which satisfy the usual remoteness tests. This broad common law principle is subject to an anomalous, that is, unprincipled, exception regarding one particular type of loss arising in respect of one particular type of claim. The exception comprises claims for interest losses by way of damages for breach of a contract to pay a debt. The general common law principle does not apply to such claims. Damages are not recoverable in cases falling within this exception.
The origin of this exception to the general principle is not impressive. Nor is its subsequent history. The late Dr F A Mann once said this exception showed the common law of England ‘at its worst’: “On Interest, Compound Interest and Damages” (1985) 101 L Q R 30, page 47.
I can start in 1829. This is when matters took an unfortunate turn. In that year Lord Tenterden CJ delivered the judgment of the Court of King’s Bench in Page v Newman (1829) 9 B & C 378. Captain Page had loaned various sums of money to Mr Newman while they were prisoners of war together at Verdun in 1814. In 1819 Mr Page claimed repayment of £135 plus interest. The court held that, in the absence of agreement, money lent does not carry interest. The reason was one of practical convenience. The contrary rule would be ‘productive of great inconvenience’, because ‘it might frequently be made a question at nisi prius whether proper means had been used to obtain payment of the debt, and such as the party ought to have used’ (page 381). In other words, difficulties might arise in determining whether a claimant had taken reasonable steps to mitigate his loss.
Shortly thereafter Lord Tenterden promoted the Civil Procedure Act 1833 (3 & 4 Wm 4 c 42), known colloquially as Lord Tenterden’s Act. Section 28 empowered juries to award interest on ‘debts or sums certain’ in defined circumstances. These circumstances were strictly interpreted by the courts. Section 28 proved to be of limited value in meeting the perceived shortcoming in the common law.
In 1893 the problem came before your Lordships’ House in London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429. The appellant company claimed money due on the taking of an account together with interest. The official referee who took the account allowed interest under Lord Tenterden’s Act. On appeal the company contended that, even if it was not within the statute, it could recover interest by way of damages for wrongful detention of its debt. The House rejected the submission. The House decided that at common law a court had no power to award interest by way of damages for the late payment of a debt.
The House reached its conclusion with reluctance. Lord Herschell LC said that a person wrongfully withholding money ought not in justice to benefit by enjoying the use of that money (page 437). He considered Lord Tenterden’s ‘inconvenience’ reasoning in Page v Newman was not a satisfactory basis for excluding a claim to interest by way of damages in cases where justice requires it should be awarded. He also considered the statutory provision was ‘too narrow for the purposes of justice’ (pages 440-441). But the combination of three factors made it impossible to reopen the question. The factors were the decision in Page v Newman, the intervention of the legislature, and the absence over the preceding 60 years of any case giving practical effect to the more liberal views of Lord Mansfield CJ and other judges.
Some 40 years later Parliament enacted section 3 of the Law Reform (Miscellaneous Provisions) Act 1934. This replaced section 28 of Lord Tenterden’s Act. Section 3 empowered courts, in proceedings to recover any debt or damages, to award simple interest on the amount for which judgment was given for the period from when the cause of action arose to the date of judgment. This provision applied more widely than the much criticised section 28 of Lord Tenterden’s Act but there were still huge gaps. There was no provision for the payment of interest where a debt was paid after proceedings for its recovery had been commenced but before judgment. Nor did the section apply where a debt was paid late but before the inception of proceedings.
In 1952 Denning LJ, not for the first time, showed the way forward. Trans Trust SPRL v Danubian Trading Co Ltd [1952] 2 QB 297 concerned a claim for damages for breach of contract in failing to provide a confirmed credit. As an aside, and with the support of Romer LJ, Denning LJ said the only principled ground on which damages can be refused for non-payment of money is remoteness. He suggested that when a special loss is foreseeable at the time of the contract as the consequence of non-payment, such loss might well be recoverable: page 306. In other words, the common law rule confirmed in the London, Chatham and Dover Railway case is limited in its scope. A particular loss arising from the late payment of money may well be recoverable where it meets the ordinary remoteness test applied to losses arising from breaches of contract.
This suggestion was taken up by the Court of Appeal in Wadsworth v Lydall [1981] 1 WLR 598. The court held that interest charges incurred by Mr Wadsworth as a result of Mr Lydall’s late payment of money were recoverable as damages for breach of contract. Brightman LJ noted, at page 603, that in the London, Chatham and Dover Railway case your Lordships’ House was concerned only with a claim for interest by way of general damages. In a much-quoted passage he continued:
‘If a plaintiff pleads and can prove that he has suffered special damage as a result of the defendant’s failure to perform his obligation under a contract, and such damage is not too remote on the principle of Hadley v Baxendale (1854) 9 Exch 341, I can see no logical reason why such special damage should be irrecoverable merely because the obligation on which the defendant defaulted was an obligation to pay money and not some other type of obligation.’
Clearly, Brightman LJ’s generalised reference to ‘the principle of Hadley v Baxendale’ was intended to be no more than a reference to that case as the locus classicus on the remoteness test applicable in breach of contract cases.
In the following year section 3 of the Law Reform (Miscellaneous Provisions) Act 1934 was superseded by a new statutory provision, inserted into the Supreme Court Act 1981 as section 35A: see the Administration of Justice Act 1982, section 15. This section is still in force. For present purposes it is sufficient to note that the effect of section 35A is much the same as section 3 of the 1934 Act save that, unlike the 1934 Act, the new provision covers also the case where a defendant paid his debt after the inception of proceedings but before judgment: section 35A(3). There is still no provision in the Act for debts paid late but before the inception of proceedings. Nor is there provision for compound interest.
The Pintada decision
I come next to the important decision of this House in the Pintada case: President of India v La Pintada Compania Navigacion SA [1985] 1 AC 104. The case concerned a claim by ship owners for interest on freight and demurrage paid late. Lord Brandon of Oakbrook delivered the leading speech, with which all their Lordships agreed. Lord Brandon approved the decision in Wadsworth v Lydall. He held that, contrary to common belief, the London, Chatham and Dover Railway case applied only to claims for interest by way of general damages. It did not extend to claims for special damages. He said this interpretation of the London, Chatham and Dover Railway case would reduce considerably the scope of that case as generally understood: page 127.
Unfortunately Lord Brandon’s analysis has given rise to its own difficulty. In ordinary legal usage general damages comprise losses which must be pleaded and proved but which are quantified in money terms by the court. Special damages comprise losses which must be pleaded and proved in money terms. To take a simple example: damages for the loss of a limb are an instance of general damages, damages for the cost of medical treatment are special damages. With both general and special damages questions of remoteness may arise.
The difficulty with Lord Brandon’s approach is that he adopted a different criterion when distinguishing general and special damages. He said that in this context the difference between general and special damages corresponds to the difference between damages recoverable under the first part of the rule in Hadley v Baxendale (1854) 9 Exch 341 (general damages) and damages recoverable under the second part of that rule (special damages).
Use of this criterion produces a widely criticised result. Certainly, on its face, the result is extraordinary. The first limb of Hadley v Baxendale applies to losses arising according to the ordinary course of things, the second limb applies to losses which may reasonably be supposed to have been in the parties’ contemplation when they made the contract as the probable result of a breach. The application of this distinction in the present context means that interest losses arising from the late payment of money in the ordinary course of things, however serious these may be, are irrecoverable, but other losses are recoverable. The distinction thus drawn was castigated by Staughton J in President of India v Lips Maritime Corporation [1985] 2 Lloyd’s Rep 180, 185:
‘If it is plain and obvious to all and sundry that loss would be suffered in the event of late payment, it cannot be recovered; but if the loss only results from peculiar circumstances known to the two parties to the contract, it can be.’
In the High Court of Australia Mason CJ and Wilson J observed that this subverts the second limb of Hadley v Baxendale from its intended purpose: Hungerfords v Walker (1989) 171 CLR 125, 142.
Lord Brandon did not explain why this distinction should be made. The rationale may perhaps be gleaned from what he said when your Lordships’ House revisited the subject three years later in President of India v Lips Maritime Corporation [1988] 1 AC 395. That case concerned a claim to recover exchange currency losses as damages for late payment of demurrage. The House held that, not being a claim for interest losses as damages for late payment of a debt, this claim lay outside the common law exception to the general rule. Lord Brandon emphasised that the only reason the House did not depart from the London, Chatham and Dover Railway case when deciding the Pintada case was the subsequent intervention of the legislature in 1934 and again in 1982. Departure would produce an undesirable conflict between the right to recover interest at common law and the statutory entitlement to recover interest on a discretionary basis, page 424.
A possible inference from this may be that in Lord Brandon’s view entitlement to recover interest losses arising in the ordinary course of things would conflict with the statute but entitlement to recover other interest losses would not. If this is the rationale I must respectfully disagree with Lord Brandon. Clearly, conflict with section 35A of the Supreme Court Act 1981 is to be avoided. But this important consideration does not necessitate or justify the use made in the Pintada case of the distinction between the first and second limbs of the rule in Hadley v Baxendale. Section 35A is of general application. It applies generally to proceedings for recovery of a debt or damages. The court is empowered to award simple interest on a discretionary basis. If, as the House held in Pintada, interest losses falling within the second limb of Hadley v Baxendale are recoverable at law despite the statute, the same must surely be true of interest losses falling within the first limb. The policy considerations underlying this general statutory provision cannot apply differently to interest losses according to which limb of a remoteness rule they fall within.
Sempra’s claim for damages
I have almost reached journey’s end on this issue. I pause to note one point which is clear beyond a peradventure. In the present case Sempra is not claiming damages for interest losses caused by late payment of a debt. Sempra is claiming interest losses as damages for breach of a statutory duty. As such Sempra’s claim does not fall within the exception to the general common law rules. Accordingly Sempra’s damages claim is subject to the same rules as apply generally to damages claims in tort. Subject to satisfying those rules Sempra is entitled to recover damages in respect of the losses of interest, whether simple or compound, it sustained by reason of the wrongful levying of ACT.
This being so, no difficulty arises in English law from the fact that the ACT exacted unlawfully was mostly utilised by being set off against Sempra’s mainstream corporation tax liability before Sempra commenced proceedings. Sempra’s cause of action arose when it suffered loss by having to provide the ACT. The subsequent utilisation of the ACT by way of set off did not extinguish Sempra’s existing claim for damages.
The restrictive common law exception today
This conclusion suffices to dispose of the damages issue in the present case. I go further, in view of the wide-ranging arguments presented to your Lordships. The common law should sanction injustice no longer. The House should recognise the remnant of the restrictive common law exception for what it is: the unprincipled remnant of an unprincipled rule. The House should erase the remains of this blot on English common law jurisprudence. The House should do so by taking to its logical conclusion the step initiated by the House in 1984 in the Pintada case. This would accord with an observation of Lord Woolf in Westdeutsche Landesbank Girozentrale v Islington Borough Council [1996] AC 669, 733. Lord Woolf noted that, despite the lapse of time since the London, Chatham and Dover Railway case was decided in 1893, ‘the courts will be prepared to limit the application of that decision where this can be done in accordance with principle and it is appropriate to do so.’
In the Pintada case the House made clear that, contrary to the general understanding of the effect of the London, Chatham and Dover Railway case, claims for damages for interest losses suffered as a result of the late payment of money are not taboo. That is plainly right. Those who default on a contractual obligation to pay money are not possessed of some special immunity in respect of losses caused thereby. To be recoverable the losses suffered by a claimant must satisfy the usual remoteness tests. The losses must have been reasonably foreseeable at the time of the contract as liable to result from the breach. But, subject to satisfying the usual damages criteria, in principle these losses are recoverable as damages for breach of contract. This is so even if the losses consist of a liability to pay borrowing costs incurred as a result of the late payment, as happened in Wadsworth v Lydall [1981] 1 WLR 598. And this is so irrespective of whether the borrowing costs comprise simple interest or compound interest.
To this end, if your Lordships agree, the House should now hold that, in principle, it is always open to a claimant to plead and prove his actual interest losses caused by late payment of a debt. These losses will be recoverable, subject to the principles governing all claims for damages for breach of contract, such as remoteness, failure to mitigate and so forth.
In the nature of things the proof required to establish a claimed interest loss will depend upon the nature of the loss and the circumstances of the case. The loss may be the cost of borrowing money. That cost may include an element of compound interest. Or the loss may be loss of an opportunity to invest the promised money. Here again, where the circumstances require, the investment loss may need to include a compound element if it is to be a fair measure of what the plaintiff lost by the late payment. Or the loss flowing from the late payment may take some other form. Whatever form the loss takes the court will, here as elsewhere, draw from the proved or admitted facts such inferences as are appropriate. That is a matter for the trial judge. There are no special rules for the proof of facts in this area of the law.
But an unparticularised and unproved claim simply for ‘damages’ will not suffice. General damages are not recoverable. The common law does not assume that delay in payment of a debt will of itself cause damage. Loss must be proved. To that extent the decision in the London, Chatham and Dover Railway case remains extant. The decision in that case survives but is confined narrowly to claims of a similar nature to the simple claim for interest advanced in that case. Thus, that decision is to be understood as applying only to claims at common law for unparticularised and unproven interest losses as damages for breach of a contract to pay a debt and, which today comes to the same, claims for payment of a debt with interest. In the absence of agreement the restrictive exception to the general common law rules prevails in those cases.
The common law’s unwillingness to presume interest losses where payment is delayed is, I readily accept, unrealistic. This is especially so at times when inflation abounds and prevailing rates of interest are high. To require proof of loss in each case may seem unduly formalistic. The common law can bear this reproach. If a party chooses not to prove his interest losses the remedy provided by the law is to be found in the statutory provisions.
I must emphasise that limiting the scope of the restrictive common law exception in this way does not lead to a result which conflicts with the legislation, or with the underlying legislative policy, for two reasons. First, section 35A of the 1981 Act is not an exhaustive code. It is not intended to be an exhaustive code. Section 35A does not displace any jurisdiction the courts themselves have to award interest. This is made plain by subsection (4). Courts of equity, for instance, have long exercised a jurisdiction to award interest, including compound interest, in certain circumstances. Likewise with the Late Payment of Commercial Debts (Interest) Act 1998, now amended by the Late Payment of Commercial Debts Regulations 2002 (SI 2002 No 1674). This Act implies into certain types of contracts a term to the effect that a qualifying debt carries interest in accordance with the provisions of the Act. But a debt does not carry interest under a term implied by the Act if, or to the extent that, a right to demand interest on it, which exists by virtue of any rule of law, is exercised: section 3(3).
Secondly, section 35A is concerned with interest on debts and damages. The section says nothing about the principles to be applied by a court when assessing the amount of damages for which it gives judgment. The section does not preclude a court from taking interest losses into account when awarding damages for breach of contract. This has long been the general understanding. This is shown by the string of reported cases where interest losses have been recovered as damages in claims for breach of contract or in respect of torts, or would have been so recovered if the losses had been proved. These interest losses have included losses calculated on a compound basis where appropriate. Among the cases are Brandeis Goldschmidt & Co Ltd v Western Transport Ltd [1981] 1 QB 864, Swingcastle Ltd v Gibson [1991] 2 AC 223, Nigerian National Shipping Lines Ltd v Mutual Ltd [1998] 2 Lloyd’s Rep 664, Hartle v Laceys [1999] 1 PN 315, and Mortgage Corporation v Halifax (SW) Ltd [1999] 1 PN 159.
For these reasons I consider the court has a common law jurisdiction to award interest, simple and compound, as damages on claims for non-payment of debts as well as on other claims for breach of contract and in tort.
Interest benefits and restitution
Against this background I turn to the two restitutionary causes of action asserted by Sempra. Sempra’s claim is that it paid ACT in response to an unlawful demand and under a mistake of law. On both these bases the Inland Revenue’s receipt of ACT comprised unjust enrichment at the expense of Sempra. Of these two formulations Sempra much prefers the second because of the extended limitation period applicable under the Limitation Act 1980, section 32(1)(c). Sempra’s claim is that under both causes of action restitution requires the Inland Revenue to pay Sempra the value of the benefit the Inland Revenue obtained by having use of the money Sempra paid as ACT.
In principle this claim is unanswerable. The benefits transferred by Sempra to the Inland Revenue comprised, in short, (1) the amounts of tax paid to the Inland Revenue and, consequentially, (2) the opportunity for the Inland Revenue, or the Government of which the Inland Revenue is a department, to use this money for the period of prematurity. The Inland Revenue was enriched by the latter head in addition to the former. The payment of ACT was the equivalent of a massive interest free loan. Restitution, if it is to be complete, must encompass both heads. Restitution by the Revenue requires (1) repayment of the amounts of tax paid prematurely (this claim became spent once set off occurred) and (2) payment for having the use of the money for the period of prematurity.
In the ordinary course the value of having the use of money, sometimes called the ‘use value’ or ‘time value’ of money, is best measured in this restitutionary context by the reasonable cost the defendant would have incurred in borrowing the amount in question for the relevant period. That is the market value of the benefit the defendant acquired by having the use of the money. This means the relevant measure in the present case is the cost the United Kingdom government would have incurred in borrowing the ACT for the period of prematurity. Like all borrowings in the money market, interest charges calculated in this way would inevitably be calculated on a compound basis.
The present position in English law
The present state of English law does not accord with this analysis. At present the court is considered to have no jurisdiction, that is, no power to make an award of compound interest on a personal claim for restitution of a sum of money paid by mistake or following an unlawful demand. The court has power to make an award of simple interest under section 35A of the Supreme Court Act 1981. But, as the authorities now stand, English law does not recognise that a restitutionary award at common law should include restoration to the claimant of the time value of the money he transferred to the defendant and which the defendant enjoyed by having the money in his possession.
How did this divergence from reality come about? How is it that, to paraphrase Lord Goff’s words in Westdeutsche Landesbank Girozentrale v Islington London B C [1996] 669, 691, English law is revealed as incapable of doing full justice? Once more the answer lies in the historical origin of this area of the law. The restitutionary cause of action relied upon by Sempra derives from a contrived extension of the indebitatus assumpsit form of action. A plea of ‘money had and received to the plaintiff’s use’ was regarded as apt where a defendant was under an obligation ‘from the ties of natural justice’ to refund money to the plaintiff. This plea appears to have been in common use from the early 17th century. The law implied a debt, and gave a cause of action, ‘as it were upon a contract’, in the well known words of Lord Mansfield CJ in Moses v Macferlan 2 Burr 1005, 1008. Lord Mansfield likened this to a claim ‘quasi ex contractu, as the Roman law expresses it’.
That was in 1760. Heavily influenced by the fictitious nexus with a claim for breach of contract, the courts set themselves against awarding interest on a claim for money had and received: see Walker v Constable (1798) 1 Bos & Pul 306, De Havilland v Bowerbank (1807) 1 Camp 50, per Lord Ellenborough, De Bernales v Fuller (1810) 2 Camp 426, Depcke v Munn (1828) 3 Car & P 112, per Lord Tenterden CJ, and Fruhling v Schroeder (1835) 2 Bing (N C) 78. This approach culminated in the Privy Council decision in Johnson v The King [1904] AC 817. On a claim for repayment of money paid by mistake the Board considered an order for payment of interest would be inconsistent with the law as settled in London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429. In other words, in the London, Chatham and Dover Railway case your Lordships’ House had decided that at common law a court had no jurisdiction to award interest on the late payment of a debt. The position was the same regarding an award of interest on a claim for repayment of money paid by mistake because a claim for repayment of money paid by mistake is founded on an implied contract.
This fiction of an implied contract lingered long in the law. It continued to govern the ambit of the remedy for money had and received. In 1914, for instance, in Sinclair v Brougham [1914] AC 398, 417, Viscount Haldane LC said the remedy was given only ‘where the law could consistently impute to the defendant at least the fiction of a promise’. This fetter on the principled development of the law of restitution was not finally removed until the celebrated decision of your Lordships’ House in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548. It is now accepted law that a claim for restitutionary relief is not founded on a fictitious implied contract or ‘quasi-contract’. This is a false and misleading characterisation of the nature of claims for restitution as a remedy for unjust enrichment.
The Lipkin Gorman decision was in 1991. Meanwhile the law on the courts’ inability to award interest at common law on restitutionary claims remained as settled by Lord Mansfield CJ in 1760. The common law regarding claims for interest as damages for non-payment of debt had developed to some extent. The unsatisfactory rule established authoritatively in the London, Chatham and Dover Railway case was partly ameliorated by the decision in President of India v La Pintada Compania Navigacion SA [1985] 1 AC 104. No such ameliorating development took place in the law of restitution.
So it is perhaps not surprising that as recently as ten years ago the law concerning interest in restitution cases was still generally understood to be as enunciated by Lord Mansfield, Lord Ellenborough and Lord Tenterden. Hence it came about that in 1996, in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, counsel opened an appeal in your Lordships’ House on a claim for compound interest on money paid under interest rate swaps held to be void with these words:
‘Both parties accept that compound, as opposed to simple, interest is payable only if the council received the money under the void interest rate swaps agreement as fiduciary …’
The court has jurisdiction to award simple interest under section 35A of the Supreme Court Act 1981, because ‘debt or damages’ in section 35A includes any sum of money recoverable by one party from another: see BP Exploration Co (Libya) Ltd v Hunt (No 2) [1983] 2 AC 352. But no interest, whether compound or simple, is recoverable at common law. Sometimes interest, compound as well as simple, is recoverable in equity.
The appeal in the Westdeutsche case proceeded on that footing. Lord Goff of Chieveley recorded this, noting that the central issue was whether there is jurisdiction in equity to award compound interest in a case such as the instant case: pages 690-691. The majority of the House, comprising Lord Browne-Wilkinson, Lord Slynn of Hadley and Lord Lloyd of Berwick, held there is no such jurisdiction. Lord Goff and Lord Woolf dissented. They held an award of compound interest in equity is necessary to grant full restitution. In exercise of its equitable jurisdiction the court has power to make such an award in personal claims in restitution.
In these unusual circumstances I consider it is open to your Lordships’ House on this appeal to re-examine the basic point of law conceded and not argued on the Westdeutsche appeal, namely, whether interest may be awarded by the courts in exercise of their common law jurisdiction to grant personal restitutionary relief. Further, I consider your Lordships should undertake this task. Having only recently been released from the shackles of implied contract and, hence, the restraints of the London, Chatham and Dover Railway case, the law of restitution should now have the opportunity to develop as a coherent body of principled law. The decision of the House in a case where this point was conceded and assumed cannot properly stand in the way.
If the House takes this opportunity I venture to repeat there can only be one answer on this important question of law. Nobody has suggested a good reason why, in a case like the present, an award of compound interest should be denied to a claimant. An award of compound interest is necessary to achieve full restitution and, hence, a just result. I would hold that, in the exercise of its common law restitutionary jurisdiction, the court has power to make such an award. I agree with the thrust of Mummery LJ’s observations on this point in NEC Semi-Conductors Ltd v Inland Revenue Commissioners [2006] STC 606, 642-643, paras 172-175. To that extent I would depart from the decision on the Westdeutsche appeal.
If this approach is adopted the unfortunate decision in the London, Chatham and Dover Railway case will be effectually buried in relation to the payment of interest for non-payment of a debt and in relation to the payment of interest for having the use of money in personal restitution cases. The law will achieve a principled measure of consistency between contractual obligations and restitutionary obligations. The common law in Australia has developed in this way. The common law in England should do likewise.
I add that, as with awards of compound interest as damages for non-payment of a debt, so also with awards of compound interest as restitutionary relief in respect of a defendant’s unjust enrichment: such awards do not conflict with section 35A of the Supreme Court Act 1981. As already noted, section 35A is concerned with interest on ‘a debt or damages’. An amount of money recoverable as restitutionary relief falls within this phrase. Section 35A bites on that amount. But section 35A says nothing about the principles to be applied by the courts at the anterior stage when assessing the amount of money required to achieve full restitution.
Further, as with the damages claim in the present proceedings, so also with the two restitutionary claims, no difficulty arises from the fact that Sempra’s ACT payments were mostly used before the inception of proceedings. The Inland Revenue had the benefit of the use of each payment of ACT for at least eight months. Setting off a payment of ACT against Sempra’s mainstream corporation tax liability did not extinguish the Inland Revenue’s restitutionary liability in respect of the interest benefits it had by then obtained from the ACT payments.
Measuring the value of the use of money
I mentioned above that in cases of personal restitution the value of the use of money is prima facie the reasonable cost of borrowing the money in question. I should elaborate a little on this, noting first that a comparable objective measure is well established in the analogous case of valuing the benefit derived by a defendant from unauthorised use of the claimant’s land or goods. In the modern terminology these are instances of restitution for wrongdoing as distinct from restitution for unjust enrichment. The Earl of Halsbury’s chair and Lord Shaw’s horse are famous hypothetical examples of the application of this ‘user’ principle: see The Mediana [1900] AC 113, 117, and Watson, Laidlaw & Co Ltd v Pott, Cassels and Williamson (1914) 31 RPC 104, 119. If the unauthorised use causes injury, damages will be recoverable. If the unauthorised use does not cause damage the defendant must still recompense the plaintiff for the benefit he unjustly received. This distinction was drawn explicitly in cases such as Whitwham v Westminster Brymbo Coal and Coke Co [1896] 2 Ch 538 and Penarth Dock Engineering Co Ltd v Pounds [1963] 1 Lloyd’s Rep 359. In Attorney General v Blake [2001] 1 AC 268, 278, I summarised the ordinary measure of the benefit in this type of case as the price a reasonable person would pay for the right of user.
The time value of money, measured objectively in this way, is to be distinguished from the value of the benefits a defendant actually derived from the use of the money. The latter value is not in point in the present case. Sempra retained no proprietary interest in the money it paid to the Inland Revenue, and it has no interest in the ‘fruits’ of that money. Sempra’s claim is a personal claim against the Inland Revenue in respect of the benefits it transferred to the Revenue. The value of those benefits should be measured as described above.
In the present case there can be nothing unjust in requiring the Inland Revenue to pay compound interest, by way of restitution, on the huge interest free loan constituted by Sempra’s payment of ACT. But this will not always be so. For instance, a recipient of a payment made by a mistake shared by both parties might make no actual use of the money. He might pay the money into a current account at a bank yielding little or no interest. When the mistake comes to light he repays the money. In such a case, depending on the circumstances, it might well be most unfair that he should be out of pocket by having to make an additional payment, whether as compound interest or even simple interest, in respect of the ‘time value’ of the money he received.
Here, as elsewhere, the law of restitution is sufficiently flexible to achieve a just result. To avoid what would otherwise be an unjust outcome the court can, in an appropriate case, depart from the market value approach when assessing the time value of money or, indeed, when assessing the value of any other benefit gained by a defendant. What is ultimately important in restitution is whether, and to what extent, the particular defendant has been benefited: see Professor Burrows, The Law of Restitution, 2nd ed, (2002), page 18. A benefit is not always worth its market value to a particular defendant. When it is not it may be unjust to treat the defendant as having received a benefit possessing the value it has to others. In Professor Birks’ language, a benefit received by a defendant may sometimes be subject to ‘subjective devaluation’: An Introduction to the Law of Restitution (1985), page 413. An application of this approach is to be found in the Court of Appeal decision in Ministry of Defence v Ashman [1993] 2 EGLR 102. Whether this is to be characterised as part of the ‘change of position’ defence available in restitution cases is not a matter I need pursue.
Other submissions
The Inland Revenue pointed out that the general position under the United Kingdom tax regime, both for direct and indirect taxes, is that taxpayers who pay tax late are required to pay simple interest, and taxpayers who overpay tax are entitled to repayment together with an amount based on simple interest. Mr Glick QC submitted there is no compelling reason why the taxpayers in the present actions should receive more favourable interest treatment than taxpayers with other claims based on domestic law.
The point is not without force. But this is now water under the bridge. In Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 a similar submission was made regarding the availability of interest under section 35A, as opposed to the statutory repayment supplements. The point was upheld by Lord Keith of Kinkel and Lord Jauncey of Tullichettle. The majority of the House, however, took a different view. A restitutionary cause of action arose, with the usual consequences regarding interest, when the building society made the tax payments required by the ultra vires regulations. This was so, even though in the result the building society received more favourable interest treatment than other overpaying taxpayers
The Woolwich case concerned a claim to simple interest under section 35A. But on this point no sensible distinction can be drawn between an overpaying taxpayer’s right to seek interest under section 35A and, as in the present case, an overpaying taxpayer’s entitlement to an award of interest, simple or compound, as damages or as an element of substantive restitutionary relief.
The Inland Revenue also submitted that Sempra’s restitutionary claim based on mistake stands apart from Sempra’s other two causes of action. Sempra’s claims for damages for breach of statutory duty and restitution in respect of tax paid pursuant to an unlawful demand are directly founded on the United Kingdom’s breach of the Treaty. This is not so with the claim based on mistake. The claim based on mistake is founded on Sempra’s own mistake. The fact that Sempra’s mistake arose because of this country’s breach of the Treaty is not part of Sempra’s cause of action. This distinction, it was submitted, provides a principled justification for treating Sempra’s mistake-based claim differently from its other claims so far as compound interest is concerned.
Here again this point has already been decided adversely to the Inland Revenue. The effect of the decisions of this House in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 and Deutsche Morgan Grenfell Group Plc v Inland Revenue Commissioners [2006] 3 WLR 781 is that money paid by mistake can be recovered, whether the mistake is of fact or law. Money paid by way of tax does not stand on a different footing. In principle the restitutionary consequences are the same for tax payments made by mistake as they are for other payments made by mistake.
The seriously untoward consequences this may have for the Inland Revenue flow from the open-ended character of the extended limitation period prescribed by section 32(1)(c) of the Limitation Act 1980. Parliament has now recognised this extended period should not apply to payments of tax made by mistake: see section 320 of the Finance Act 2004.
The judge’s order
The effect of the judge’s order as clarified in the Court of Appeal was that the Inland Revenue should pay interest for the period of prematurity on a compound basis at a ‘conventional’ rate. No distinction was drawn between the rate applicable to the claim for damages and the rate applicable to the restitutionary claims.
This order should stand so far as it relates to the claim for damages. The reference to a ‘conventional’ rate was intended to dispense with the need for protracted investigation of the financial affairs of the parties and of other claimants. On the claims for damages a conventional rate should be taken to refer to the rate at which a substantial commercial company could borrow the amounts in question in the market at the relevant time.
The United Kingdom government can of course borrow more cheaply than commercial companies. With the restitutionary claims therefore the reference to a conventional rate should be taken to refer to the rate at which the government could borrow the relevant amounts in the market at the relevant times. The need for this distinction came to light as a result of the much fuller submissions on the law of restitution presented to the House.
I add one further note on the form of the judge’s order. The order provided for payment of simple interest pursuant to section 35A for the period from the date of set off until judgment. Sempra did not challenge this provision. So this provision in the order will stand. But I am not to be taken as accepting that compound interest was unavailable for this period. Sempra’s financial losses caused by payment of ACT did not wholly cease at the date of set off. Sempra remained out of pocket for the unpaid interest, and its financial losses in this regard continued to accrue up to judgment. Similarly, as to the restitutionary claims: after the date of set off the Inland Revenue continued to derive interest benefits from the benefits it had already obtained from having use of the ACT payments.
An effective remedy
I can now state my conclusion on whether English law provides an effective remedy for the United Kingdom’s breach of article 43 of the Treaty. In my view it plainly does. For the reasons given above, compound interest is available under English law when quantifying the extent of Sempra’s losses and when quantifying the extent of the Inland Revenue’s unjust enrichment.
I would not refer a question to the ECJ for preliminary ruling. A reference to the ECJ is not necessary. It would serve no useful purpose. English law provides for compound interest to be awarded or taken into account when quantifying the financial remedies available to Sempra under the three asserted causes of action. There would be no point in seeking a ruling on whether Community law requires payment of compound interest. Subject to the variation in the judge’s order mentioned above, I would dismiss the appeal.
LORD SCOTT OF FOSCOTE
My Lords,
Having had the great advantage, before writing this opinion, of reading the opinions of all my noble and learned friends I gratefully adopt their analysis of the previous case law regarding awards of interest on tortious, contractual and restitutionary claims and, since I cannot improve upon or usefully add to that analysis, I shall content myself with expressing my concurrence with the conclusion which appears to me to have been reached by all my noble and learned friends, that interest losses caused by a breach of contract or by a tortious wrong should be held to be in principle recoverable, but subject to proof of loss, remoteness of damage rules, obligations to mitigate damage and any other relevant rules relating to the recovery of alleged losses. That conclusion, however, does not dispose of this appeal. It deals with, and accepts, Sempra’s interest claims to the extent that they are claims for compensation for loss. It does not deal with Sempra’s claims to the extent that they are claims in restitution. As to those claims, I regret that I am unable to accept the conclusion of the majority of your Lordships that the restitutionary remedy allowed by the law of this country to a person who has made a payment under a mistake can entitle the claimant to recover not only the payment but also interest thereon that the person under the obligation to make repayment has never received or to recover the value of an assumed benefit derived from the mistaken payment that that person has never in fact enjoyed. On this issue I am in complete agreement with what my noble and learned friend Lord Mance has said. The conclusion of the majority, in my respectful opinion, confuses the remedy for a payment made under a mistake with the remedy for loss caused by a wrongful act. The wrongful act may be tortious, or a breach of contract, or it may be, as here, a breach of some statutory obligation. But, whichever it is, the claimant’s cause of action is for loss caused by the wrongful act. Where, on the other hand, the cause of action is for recovery of money paid, or property transferred, by mistake, the remedy, if the cause of action can be made good, is one of recovery, or “disgorgement” as some of your Lordships have put it. There is no need to plead or prove a wrongful act on the part of the recipient against whom the remedy is claimed. If the money has actually earned interest, the claimant ought, in my opinion, subject to change of position defences, to be able to recover not only the money but also the interest. This is not because the interest belongs in law to the claimant. The claim is an in personam claim, not a proprietory one. It is a claim based on the unjust enrichment of the recipient who has received money he had no right to receive or, having received it, to retain. The remedy, therefore, subject to change of position defences, should restore to the claimant the extent of the unjust enrichment but no more. If interest had been earned on the money it ought, in my opinion, to be held to be prima facie recoverable as part of the restitutionary remedy for the unjust enrichment. Whether, if some other tangible benefit had been obtained by the recipient, that too, if quantifiable in money terms, should be accounted for to the claimant does not arise on this appeal and should be left to be decided when it does arise. But if interest had not been earned then, whether or not interest could or should have been earned, the restitutionary remedy should not, in my opinion, allow the recovery of anything other than the money itself. In such a case the remedy for the recovery of interest would not be a restitutionary one but a claim for compensation to the claimant for having been kept out of his money. It may be that in some cases a claimant would have both a restitutionary remedy for the return of money paid by mistake and a claim for compensation for loss caused by a wrongful act that had induced the mistaken payment. But if a claim is to be made for interest that cannot be, or has not been, shown to have been received by the recipient of the mistaken payment, the claim must, in my opinion, be prosecuted as a claim for compensation and, as such will be subject among other things to the rules applicable to such claims. These will include limitation of action rules. If the distinction between claims for compensation for loss on the one hand and claims for restitution on unjust enrichment grounds on the other hand is not recognised, incoherence of legal principle will, in my opinion, be the result.
A confusion between compensatory claims and restitutionary claims seems to me apparent in this case and starts with the judgment of the European Court of Justice (the ECJ) in the conjoined Metallgesellschaft and Hoechst cases [2001] Ch 620. This confusion appears to me to have been not the fault of the ECJ but a consequence of the way in which the questions put to the ECJ by the High Court had been formulated and to have been compounded by a misreading of the thrust of the ECJ’s answers to those questions. The second of these questions asked whether, in the event that the ACT regime was not consistent with Community law –
“the … provisions of the EC Treaty give rise to a restitutionary right for a resident subsidiary [such as Sempra] to claim a sum of money by way of interest on the [ACT] which the subsidiary paid …. or can such a sum only be claimed, if at all, by way of an action for damages …?”
The Advocate General re-formulated this question in paragraph 41 of his advice
“… are [Sempra] entitled to a restitutionary claim or only to a compensatory claim for damages for breach of Community law?”
and, in paragraph 45, expressed the principle underlying the remedy to be afforded to Sempra:-
“… a member state must not profit and an individual who has been required to pay the unlawful charge must not suffer loss as a result of the imposition of the charge” (emphasis added).
This passage seems to me a very important one. A member state must not profit from the levying of an unlawful charge and the person required to pay the unlawful charge must not suffer from having done so. This is language describing the approach to a remedy for a wrongful act. It is not language apt for describing a remedy for money paid by mistake. The Advocate General then went on to cite a highly relevant passage from the Dilexport Srl v. Amministrazione delle Finanze dello Stato (Case C-343/96) [1999] ECR I-579, para 25:
“… it is for the domestic legal system of each member state … to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (principle of equivalence) and, second, that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness)”
This citation was repeated by the ECJ at para.85 of its judgment.
The clear thrust of this is that provided under domestic law a remedy is available to subsidiaries such as Sempra that prevents the infringing member state from profiting from its wrongful act and does not prevent the subsidiary from recovering the loss caused to it by the wrongful act, and provided the remedy satisfies the principles of equivalence and effectiveness, Community law will be satisfied.
However the UK Government had submitted to the ECJ that under English law “no action for interest in respect of the loss of the use of monies which were ultimately set off against the paying company’s corporation tax liability would lie” and that it was for national law not Community law to determine whether interest should be paid in respect of the prematurely paid ACT (see para.46 of the Advocate General’s opinion and para.79 of the ECJ’s judgment). The ECJ made clear that this submission could not be accepted. It stressed that “it is not for the Court of Justice to assign a legal classification to the actions brought by the claimants before the national court” (para.81) but then went on to consider the scope of the remedy required by Community law to be made available “first on the assumption that the actions … are to be treated as claims for restitution of a charge levied in breach of Community law” (para.82) and “secondly, assuming that the claimant’s claims are to be treated as claims for compensation for damage caused by breach of Community law” (para.90).
This is the point, in my opinion, at which confusion creeps in. The “restitution” of which the ECJ was speaking was restitution required in consequence of the levying of a tax charge in breach of Community law. But it was not restitution of the tax itself that was in question. The obligation of the Revenue to repay the tax was not in doubt. Most of that tax had been “repaid”, before the commencement of recovery proceedings, by means of set-off against the mainstream corporation tax that had become due. In paragraph 82 the ECJ said that the question was whether the breach by the member state of Community law
“… entitles the taxpayer to reimbursement of interest accrued on the tax they have paid from the date of its premature payment until the date on which it properly fell due”
“Re-imbursement”? The use of this word suggests that the ECJ had in mind a loss suffered by the taxpayer. In paragraph 86 the ECJ referred to “the re-imbursement of charges improperly levied”. Here, by contrast, the word “re-imbursement” was clearly referring to the repayment of the improperly levied charge. But in paragraph 87 the ECJ said this:
“In the main proceedings, however, the claim for payment of interest covering the cost of loss of the use of the sums paid by way of [ACT] is not ancillary, but is the very objective sought by the claimants’ actions in the main proceedings. In such circumstances, where the breach of Community law arises, not from the payment of the tax itself but from its being levied prematurely, the award of interest represents the ‘reimbursement’ of that which was improperly paid …” (emphasis added)
This passage recognises the compensatory nature of the claim and the use of inverted commas in relation to “re-imbursement” underlines the point that an award of interest to the subsidiaries who had prematurely paid ACT would not be re-imbursement in the ordinary sense of the word. The award of interest to cover the cost of the loss of use of the sums paid by way of ACT would not constitute the restoration to the taxpayer of something that the taxpayer had previously had. It indicates an intention that the taxpayer should be put in the position in which the taxpayer would have been if the ACT had not been paid. This is compensation for “loss of use” of the money, not restitution.
The confusion between the two concepts is apparent again in paragraphs 88 and 89
“88 …. It must be stressed that in an action for restitution the principal sum due is none other than the amount of interest which would have been generated by the sum, use of which was lost as a result of the premature levy of the tax.
89 Consequently, article 52 of the Treaty entitles a subsidiary [such as Sempra] to obtain interest accrued on the [ACT] paid by the subsidiary during the period between the payment of [the ACT] and the date on which mainstream corporation tax became payable, and that sum may be claimed by way of restitution” (emphasis added)
The emphasised words in paragraph 88 show again that the ECJ had in mind compensation to the subsidiary for loss. Paragraph 89 says that that sum “may be claimed by way of restitution”. But these paragraphs proceed on the assumption referred to in paragraph 82, namely, that the claims for recovery of interest were to be treated as claims for restitution. The ECJ did not say, and it would have been quite contrary to its own well established jurisprudence for it to have said, that the actions for payment of interest had to be treated as claims for restitution (see paragraph 196 and 197 of Lord Mance’s opinion and the cases there cited). It is for domestic law to classify the actions.
The confusion becomes the more stark when the passages from the ECJ judgment to which I have referred are examined in the context of the type of restitutionary action on which Sempra is relying. In the Deutsche Morgan Grenfell Group case [2006] UKHL 49; [2007] 1 AC 558 your Lordships held that an action for restitution could lie where money had been paid under a mistake of law. This was a clarification, or perhaps a development, of previous case-law which had restricted restitutionary actions for recovery of money paid by mistake to cases where the operative mistake had been a mistake of fact. Sempra, it is said, paid the ACT under a mistake of law, that is to say, in ignorance that the ACT statutory regime was inconsistent with Community law and accordingly unlawful. It is common ground that this circumstance entitles Sempra to compensation for the loss caused to it by the unlawful levying of ACT. The payment of compensation is not a restitutionary remedy; it is a remedy for tort or for breach of statute (it does not matter which description is to be preferred). The ECJ cannot, in my opinion, be taken to have intended to reform our domestic law on restitution. Suppose this House in the Deutsche Morgan Grenfell case had ruled that a remedy for money paid under mistake of law was not available under domestic law. Would it be said that that ruling would have been contrary to Community law? That could only be said if the alternative domestic law remedy, a remedy allowing compensation for loss caused by unlawful conduct, were in some respect or other inadequate to comply fully with the Community law requirement that domestic law provide a full remedy “covering the cost of loss of the use of the sums paid by way of ACT” (para.87), essentially a requirement for a compensatory remedy. And on what coherent basis of domestic law can a restitutionary remedy for money paid under mistake include an award of the interest “which would have been generated by the sum, use of which was lost as a result” (para.88 of the ECJ judgment) of the payment? In many, perhaps most, cases the recipient of money paid under a mistake will have committed no wrongful act at all. So why should the recipient compensate the payer for the payer’s loss? On what basis should a recipient who has received no interest be made liable to “disgorge” interest? As a matter of principle, in my opinion, an innocent recipient cannot be required to disgorge something that the recipient has never had.
In summary, the ECJ was concerned in the Metallgesellschaft/Hoechst cases to ensure that domestic law provided a full remedy that took account of the consequences both to the Revenue and to the taxpaying subsidiary of the premature payment of ACT. It was not concerned to reform the law of restitution so as to ensure that a sufficient remedy in restitution as well as a sufficient remedy for compensation was available to the subsidiary.
The reality of the case being put forward by Sempra, and the other subsidiaries, is that they were constrained to pay ACT in reliance on a statutory scheme that was not compliant with Community law and was therefore unlawful, and that they should be compensated accordingly. This is a tort/breach of statute claim. Once the claim for the return of the ACT has been satisfied, the residue of the claim, i.e. the claim for interest, is not a claim for restitution other than in a highly contrived sense – hence the use by the ECJ of inverted commas around the word “re-imbursement” in paragraph 87. The re-modelling of the law relating to restitution is not necessary unless the compensation remedy is, in some respect or other, inadequate to meet Community law requirements.
The law relating to monetary awards in actions where the claim for the award is based on a wrong for which the defendant is responsible has itself become, in my opinion, somewhat incoherent. The textbooks and the cases speak of compensatory damages, aggravated damages, exemplary damages, punitive damages, restitutionary damages and even, in the United States, curative damages. These adjectives sometimes mask the legitimate purposes for which damages may be awarded. But where A has committed a wrong as a result of which B has suffered a loss or has been deprived of something of value, then, provided the wrong gives B a cause of action, B can claim compensatory damages. The purpose of the compensation is, subject to remoteness of damage rules, to place B in the position in which he would have been if the wrong had not been committed. Where a wrong committed by A has caused B to be wrongfully deprived for a period of time of a sum of money, the extent of the loss should be measured by the value to B of that sum for that period. There may be actual evidence of what B would have done with the money. The actual evidence may show that B has lost nothing. On the other hand it may show that he has lost a great deal, but of course some of that loss may be too remote to enable the claim for its recovery to succeed. At the least it can usually be said that by being deprived of the money B has lost the opportunity of leaving it on deposit at the bank for the period in question. On that sensible footing B can claim compensation measured by the interest the sum would have produced if simply left with the bank for that period. Interest would have accrued at the bank’s usual rate of interest on deposits and with the usual rests allowed by the bank’s terms. An award of interest compounded in the manner referred to would result, in my opinion, from an ordinary application of legal principles applicable to the assessment of compensatory damages for tort or breach of statute. The application of these principles would satisfy the ECJ requirement that domestic law provide a full remedy covering the loss of use of the sums paid by way of ACT.
The Advocate General in Metallgesellschaft/Hoechst referred also to the need for the domestic remedy to prevent the member state in question from making a profit out of its breach of Community law (para.45). Compensation assessed on the basis I have referred to, would satisfy the need referred to by the Advocate General.
It is certainly the case that where alternative remedies are available to a claimant, the claimant can choose which of the remedies to pursue. And it is the case that, since your Lordships have held (in the Deutsche Morgan Grenfell case) that an action for restitution in respect of money paid under a mistake of law is available to Sempra, that Sempra can choose whether to pursue its claim for interest via an action for compensation for loss or an action for restitution. There is, however, as it seems to me, a problem standing in its way if a restitutionary action is its preferred vehicle. The problem is the nature of its pleaded case.
Sempra’s writ, as amended, claimed
“Restitution of, and/or compensation for, and/or compensation for the loss of use of, monies paid pursuant to unlawful demands by [the Revenue] and/or under a mistake of law.”
This, therefore, was a combination of a claim for restitution of money paid pursuant to a demand (unlawful as the ECJ had held) by the Revenue or paid under a mistake of law, and a claim for compensation for loss of use of the money so paid. But the claim for restitution was supplemented by the following paragraph:
“Restitution for loss of use of sums so paid is to be calculated on the basis of the actual loss suffered by the plaintiff … and/or on the basis of the return which the plaintiff could have achieved by investing the sums so paid on the basis of a compound return and/or on the basis of the return which the defendants … did or could have achieved by investing the sums so paid and/or on the basis of the saving which the defendants … achieved by not having to borrow sums equivalent to the sums so paid”(emphasis added).
It is apparent, therefore, that the claim, whether expressed as a claim for restitution or as a claim for compensation, was based on Sempra’s “loss of use” of the money it had paid to the Revenue as ACT. It was not based on the “unjust enrichment” of the Revenue in having received that money prematurely. I would accept that a claim to recover interest on the money prematurely paid that the Revenue had actually obtained, or, perhaps, to recover the value of a saving actually achieved by the Revenue in not having to borrow equivalent sums, would prima facie be acceptable in a restitutionary remedy. This would be a recovery by Sempra of an actual benefit the Revenue had obtained from the premature payments. It would not represent Sempra’s “loss of use of sums so paid”. But there was no evidence that the Revenue derived any such actual benefit from the premature payments. The cited paragraph taken as a whole describes a claim for compensation dressed up, for limitation of action reasons, as a claim in restitution. The claim as described could, in my opinion, only succeed if it were based on a wrongful act. It constitutes a tort claim not a restitutionary claim. Sempra’s Re-Re-Amended Statement of Claim pleads not only a case of compensation for tort/breach of statute but also that in making the ACT payments Sempra was mistaken as to the validity of the ACT statutory regime and would not otherwise have paid the ACT. Paragraph 11C then pleads as follows:
“At all material times it is to be inferred that: [the Revenue] did or could have invested the sums paid to them by the plaintiff by way of ACT on the basis of a compound return; and/or [the Revenue] by reason of having been paid the said sums will have been saved the expense of borrowing sums on a compound basis”
The paragraph 11C allegations about investing and making savings were either denied by the Revenue or were not admitted. The Revenue said they were required by statute to place their revenue receipts in a Bank of England account over which the Treasury had control (see para.7D of the Re-Amended Defence). Park J, in his judgment, examined the interest issue solely from the point of view of Sempra (see paras.31 to 43). He asked himself, in effect, what Sempra had lost by its loss of use of the ACT. He took the view that the ECJ judgment required interest to be awarded in respect of that loss whether the claim was for compensation or was a restitutionary claim. This, in my respectful opinion, was a misreading of the Metallgesellschaft/Hoescht judgment. Because of this the judge did not ask himself whether a benefit had been obtained by the Revenue from the mistaken ACT payments, whether that benefit was quantifiable in money terms, and, if so, how it should be quantified. The same features are apparent in Chadwick LJ’s judgment in the Court of Appeal. In paragraph 49 he said, by way of summary, this –
“In my view the judge was correct to hold that the task of the national court was to give effect to the decision of [the ECJ] by providing the remedy in respect of the loss suffered by the taxpayer by reason of the premature payment of [ACT] which Community law requires. That remedy is full compensation for the loss of the use of money. The measure of compensation is interest accrued on the money over the premature payment period” (emphasis added).
This may be unexceptional and correct in relation to an action for compensation. It is not, in my opinion, in the least apt in an action for restitution. In an action of restitution it is the position of the recipient of the mistaken payment, and the benefit, if any, that the recipient has obtained from the money, on which attention should be concentrated.
The majority of your Lordships have taken the view that the Revenue’s unjust enrichment consists of the benefit of having had Sempra’s money available for use for the period between payment of the ACT and set-off (see Lord Nicholls of Birkenhead para 66) and that the domestic law on restitution should be developed so as to allow a restitutionary claim for interest, including compound interest, in order to place an objective value on that benefit. My Lords I find myself unable to accept the premise on which this proposed development is based, namely that the mere possession of mistakenly paid money – and accordingly the ability to use it if minded to do so – is sufficient to justify not simply a restitutionary remedy for recovery of the money, but a remedy also for recovery of the wholly conceptual benefit of an ability to use the money. Why should a restitutionary remedy be concerned with a benefit that is no more than conceptual? The mistake that had been made and on which the restitutionary claim is based was the mistake of the payer, Sempra in the instant case. The restitutionary claim is not based on any wrongdoing on the part of the recipient, the Revenue in the instant case. If it were so based it would be a compensation claim attracting a different limitation period. So it is not so based. I therefore repeat the question, differently phrased – why should an innocent recipient of a payment that the claimant has made by mistake be required to restore to the claimant anything additional to the amount of the payment and any actual benefit that the recipient has obtained from the payment?
My noble and learned friend Lord Nicholls, in paragraphs 116 to 118 of his opinion, has treated the “time value of money, measured objectively.” (para 117) as the measure of a benefit of which restitution should be made and, accordingly, as the basis on which the Revenue should be required to make restitution to Sempra of the benefit of receiving the “huge interest free loan constituted by Sempra’s payment of ACT” (para 118). But what is the value of a loan if the recipient has done nothing with it, has derived no actual benefit from it and has paid it back to the lender? An additional payment required to be made by the payee in those circumstances is not restitution; it is compensation to the payer for being out of his money. The cases referred to by Lord Nicholls in paragraph 116, and referred to also by Lord Mance in paragraph 230 of his opinion, all concerned compensation to the victim for a wrongful act that had caused no actual loss to the victim but had provided a benefit to the wrongdoer. They were cases where the compensation held to be payable to the victim was measured by the value of the benefit taken by the wrongdoer. These cases established a valuable and coherent principle of compensation for cases in which the victim of a wrong had suffered no actual loss but, in my respectful opinion, have nothing to do with cases where there is no wrongdoer, no case for compensation, but simply the need for restitution of the extent of an unjust enrichment that has been received. If there has been no enrichment, the mistaken payment having been restored, the question of what is just or unjust does not arise.
In my opinion, the inquiry that should have been made in the present case was whether the Revenue had derived any actual benefit from the premature receipt of Sempra’s money. The rate at which the Government can borrow in the market at the relevant times would be, in my opinion, irrelevant unless there were evidence to justify the conclusion that the Government’s borrowing in the market was less because of that premature receipt than it would otherwise have been. There was no such evidence.
Accordingly, in my opinion, this is not a case in which, on the evidence before Park J, any interest, whether simple or compound, should be ordered to be paid by the Revenue as part of a restitutionary remedy to Sempra for its mistaken payment of ACT. I agree that, in relation to Sempra’s cause of action in tort, Sempra is entitled to recover its losses brought about by the Revenue’s unlawful demand for ACT and that those losses could well include compound interest on the sums paid. But, as is common ground, Sempra’s tort remedy is, for Limitation Act reasons, abbreviated.
Summary
In my opinion the remedy which enables Sempra, and other subsidiaries in the same position, to be compensated for the loss caused by premature payment of ACT is a remedy in tort or for breach of statute. That remedy complies fully with the requirements of domestic law demanded by the ECJ in the Metallgesellschaft/Hoechst case. A remedy for recovery of money paid under a mistake of law cannot lead to compensatory damages unless it is also based on a wrongful act. To the extent that it is so based it will be an action in tort or for breach of statute. The claim to recover interest based upon the interest that would have been earned if the money used to pay the ACT had instead been placed on deposit with a bank, or upon the interest that would have been saved if the money had been used to repay borrowings, is a claim for compensatory damages. To dress that claim up as a restitutionary remedy for money paid under a mistake of law is unacceptable. To alter the claim to one requiring disgorgement by the Revenue of the benefit it has derived from the premature payments is, in principle, acceptable but fails for the want of any evidence that the Revenue did derive any benefit from the payments. A benefit cannot be simply assumed. Mere possession of money for a period is not a benefit to be valued and disgorged. I would, therefore, dismiss the appeal so far as it relates to Sempra’s claim in tort but allow the appeal so far as it relates to Sempra’s claim in restitution.
There is a final point to which I should refer, namely, whether, if the law does allow Sempra a claim to interest as a restitutionary remedy, the remedy should be regarded as a remedy as of right or as an equitable, and therefore discretionary, remedy.
The discussion about whether interest on money paid by mistake can be recovered as part of a restitutionary remedy has led your Lordships to consider claims to interest on debts, on contractual damages, and on tortious damages as well as on money paid by mistake. I concur with your Lordships in concluding that interest, whether simple or compound, can represent an item of contractual damages or tortious damages, subject to the normal rules applicable to such claims. I take the view that a claim to interest as part of a restitutionary remedy for money paid by mistake can and, subject to change of position defences should be, accepted if the interest has actually been earned, but not otherwise.
As to interest on debts, Parliament has, in section 35A of the Supreme Court Act 1981, provided a discretionary power for the court to award simple interest where proceedings are brought for the recovery of the debt, or for the recovery of contractual or tortious damages. This power enables interest to be awarded notwithstanding that the interest could not, for remoteness of damage or other reasons, qualify for award as an item of damages. As Lord Mance has pointed out (para. 221 of his opinion), the Arbitration Act 1996 conferred a discretionary power on arbitration tribunals to award, unless the parties had otherwise agreed, simple or compound interest on sums awarded in the arbitration and the Late Payment of Commercial Debts (Interest) Act 1998 provided, in certain circumstances, a right to simple interest on certain commercial debts. Moreover, where statutory debts are concerned – fiscal debts owing to the Revenue and council tax owing to local authorities are obvious examples but there are many others – payment of interest on debts that are overdue for payment is either provided for by statute or cannot be recovered. In these circumstances it seems to me that it would be inappropriate for your Lordships, acting judicially, to seek to improve on what Parliament has enacted regarding the payment of interest on unpaid debts.
Lord Mance has made clear in his opinion that recovery in a claim in restitution for money had and received of interest on the sum of money in question should be “contingent upon proof of actual benefit acquired by the recipient”. I respectfully agree, but am unable to agree that that recovery should be regarded as discretionary. The recovery is, under established common law rules, subject to change of position defences. What, in a particular case, would constitute a sufficient change of position to enable the recipient to resist an order for recovery of interest actually earned, or of the value of some other benefit acquired by the recipient by use of the principal money, would be a subject of judgmental decision in each case. The decision might, in the ordinary use of language, depend on where the judge thought the equities lay, what the judge thought was fair (see the discussion about change of position in Goff & Jones The Law of Restitution 7th ed (2007) Chap. 40). But this would not turn the remedy into a discretionary one. In my opinion, the restitutionary remedy, a common law remedy, has all the ingredients for a fair and just result to be reached. I can see no need for an ancillary equitable jurisdiction and your Lordships should not, in my opinion, construct one.
LORD WALKER OF GESTINGTHORPE
My Lords,
Introduction
I have had the privilege of reading in draft the opinions of my noble and learned friends Lord Nicholls of Birkenhead and Lord Hope of Craighead. I am essentially in agreement with them, and I too would dismiss this appeal, largely for the reasons which they give. But because of the importance of the issues before the House I add some observations of my own.
The issue in this appeal is the principles to be applied in quantifying the award to be made to Sempra Metals Ltd (“Sempra”), by way of damages or restitution, for the detriment that Sempra suffered as a result of the United Kingdom’s corporation tax regime being contrary to EU law. That the regime did contravene EU law was established by the Court of Justice (“the ECJ”) in a judgment delivered on 8 March 2001 in Metallgesellschaft Limited v IRC and Hoechst AG v IRC (joined cases C-397/98 and C-410/98) (“Hoechst”) reported at [2001] Ch 620. Sempra is the same company, under a new name, as Metallgesellschaft Limited.
The precise issue originally before the Court is set out in para 9(ii) of a Group Litigation Order (“the GLO”) made by the Chief Chancery Master on 26 November 2001. The issue is subdivided into two elements:
“(A) Where an amount of advance corporation tax [“ACT”] has been set off against a UK company’s corporation tax liability or has been surrendered to another group company or has been carried back and set off against the UK company’s corporation tax liability arising in an earlier year, at what rate and for what period and on what basis is interest due in calculating the damages and/or restitution in respect of the loss of use of the sum paid as ACT?
(B) At what rate and for what period and on what basis is interest due on the amount calculated in accordance with (A) above?”
It can be said at once that the answer to the second element of the issue is not in dispute. Park J decided that the interest should be simple interest under section 35A of the Supreme Court Act 1981 (as inserted by the Administration of Justice Act 1982), leaving the rate or rates to be determined later if the parties could not agree. There is no appeal from that (though I agree with Lord Nicholls’ observation, in para 129 of his opinion, that Sempra might have challenged it). It is the first element of the issue that has given rise to acute controversy. Park J decided ([2004] STC 1178) that the calculation should be effected on the basis of compound interest (with the rate or rates and appropriate rests to be determined later if the parties could not agree) and his decision was upheld (subject to a small drafting amendment) by the Court of Appeal ([2005] STC 687). That is the issue which is now before your Lordships’ House.
The quantification issue is only one of several important issues, with far-reaching financial implications, that have been or are being litigated under the GLO. There are also other group litigation orders raising similar points in connection with Article 43 or Article 56 of the Treaty. The background of the statutory material as to various group reliefs (and in particular group income elections postponing liability for payment of ACT) is by now very familiar to practitioners in this field. It has been covered in many judgments, the most recent being the speeches in this House in Deutsche Morgan Grenfell Group plc v IRC [2007] 1 AC 558 (“DMG”). It is unnecessary to repeat the statutory material in any detail. For present purposes the essential point is that a United Kingdom subsidiary which paid a dividend to a holding company established in another member state was deprived of the opportunity of making a group income election and so deferring payment of ACT until mainstream corporation tax (“MCT”) became payable on the subsidiary’s profits. This period would normally be between eight and a half and seventeen and a half months in duration (Peter Gibson LJ gave a full explanation of this in Pirelli Cable Holding NV v IRC [2004] STC 130, para 8) but the deferment might be longer if (because of double taxation relief or for some other reason) the subsidiary had insufficient taxable profits to attract liability to MCT at least as great as the ACT already paid. When sufficient MCT did sooner or later become payable (and was paid before the issue of any writ) what the subsidiary lost was the time value of what it had paid in ACT for a period which had a minimum duration of eight and a half months, but could in exceptional circumstances continue for several years. In this case the shortest period was just under one year and the longest was almost ten years (the details are set out in paras 62 and 63 of Lord Nicholls’ opinion).
The hearing before Park J occupied three days. This may seem a surprisingly short period since (as your Lordships were told) there was a very large volume of evidence in the form of witness statements from expert and non-expert witnesses and copious documentary evidence of a financial nature. In the event, however, the expert witnesses were not cross-examined, and oral evidence from the non-expert witnesses was deferred. That was because the judge, at the urging of Mr Glick QC for the Revenue, and without strong opposition from Mr Rabinowitz QC for Sempra, decided that the amount of any damages or restitutionary award should be computed on what Mr Glick called a “conventional” basis—that is, on general principles rather than by reference to the particular financial circumstances of the claimant (or the financial circumstances, so far as they sensibly admit of enquiry, of the Revenue): see [2004] STC 1178, paras 13 and 18 to 22. It seems that the judge may have been given an over-estimate of the number of other cases which raise this issue: between 50 and 70 was, your Lordships were told, much too high a figure. The judge’s decision that the award should be quantified on a “conventional” basis was not a ground of appeal before the Court of Appeal. But this point has to some extent been reopened before your Lordships.
Should there be another reference under Article 234 EC?
The first matter that your Lordships have to consider is whether to make a reference to the ECJ under Article 234 EC. At the beginning of the appeal hearing the House decided not to make an immediate reference but to proceed to hear argument on the substantive issues raised in the appeal. Having heard the argument I feel sure that was the right decision, and that your Lordships should resolve this appeal without a further reference.
As I have already noted, Sempra is the same company, under a new name, as Metallgesellschaft Ltd, the plaintiff in the proceedings (Ch 1995 M 7327) commenced by writ on 23 November 1995. On 2 October 1998 Neuberger J referred five questions to the ECJ under Article 234 EC. The ECJ’s judgment of 8 March 2001 ([2001] Ch 620) provided detailed answers to the first, second and fifth questions. The answer to the second question (in paras 77 to 96 of the judgment) has already given the ECJ’s considered view on the central issue in this appeal. This part of the judgment is not without its difficulties, as the argument before your Lordships has amply demonstrated. It will be necessary to make detailed reference to the ECJ’s judgment at a later stage. But I venture to suggest that its general thrust is that causes of action and remedies for any breach of EU law are matters for national law and the national courts, subject always to the very important EU principles of equivalence and effectiveness. The ECJ spelled out some of the implications, in relation to remedies, of the principle of effectiveness. In my opinion it would serve no useful purpose to make a further reference seeking fuller elucidation of the principles stated in paras 77 to 96 of the judgment, or practical guidance as to how those principles should be implemented. I think it is predictable that on a further reference the answer would amount to quod scripsi, scripsi.
I appreciate that the questions put to the ECJ in Hoechst did not refer in terms to compound interest. But had they done so the answer would surely have been that any choice between simple and compound interest was for the national court, subject always to the principles of equivalence and effectiveness. There is the complication that the Court of Appeal has on 6 February 2006 made a reference to the ECJ in a value added tax case, British Telecommunications plc v Commissioners for HM Revenue and Customs C-185/06, raising three questions in relation to tax paid by mistake but voluntarily (and not as a result of any unlawful demand or an unlawful tax regime) in circumstances where the tax authority did not contribute to the mistake and had no reason to be aware of it (the mistake was in BT’s accounting software). The third of the questions relates specifically to simple or compound interest. However your Lordships were told (in the course of the further oral argument on 16 May 2007) that the reference is likely to be withdrawn. In any case it is speculative whether the ECJ’s answer to the third question (if it arises, which is far from certain) will assist in the resolution of the appeal now before your Lordships, because both the facts and the legal issues are so different. In my opinion we must make what we can of the guidance already given by the ECJ in this very case.
Interest under national law
It is common ground, since this House’s decision in DMG [2006] 3 WLR 781, that domestic law offers Sempra three possible causes of action in respect of its premature payments of ACT under a tax regime which contravened EU law. These are
(1) an action for damages (in the nature of an action for breach of statutory duty: see R v Secretary of State for Transport ex parte Factortame Ltd (No. 7) [2001] 1 WLR 942, paras 143-158);
(2) a restitutionary claim for repayment of tax unlawfully exacted;
(3) a restitutionary claim for money paid under a mistake of law.
All these claims are put forward in Sempra’s much-amended statement of claim. The ECJ has made clear in Hoechst that the appropriate remedy is to be determined by the national court (and therefore, so far as national law permits a claimant to choose between different causes of action available to him, by the claimant). The Revenue’s position is that whichever of the three roads Sempra chooses to follow, it cannot lead to an award of more than simple interest. Nothing in the ECJ judgment, the Revenue argues, requires compound interest. The Revenue argues with particular vigour that compound interest cannot be awarded if Sempra follows the mistake of law route.
In Hoechst the ECJ deliberately avoided taking up any position as to the content of national law (the Advocate-General had in his opinion, paras 12 and 46, referred to President of India v La Pintada Compania Navigacion SA [1985] AC 104 —”La Pintada”—but the ECJ did not go into any of that detail). But it is impossible to apply the principles of equivalence and effectiveness without first considering the present state of English law as to the award of interest (either as interest on a principal sum, or as damages, or as a restitutionary remedy). So in my view your Lordships have no alternative but to embark on that burdensome task. The burden is to some extent lightened since your Lordships have the benefit of counsel’s careful and wide-ranging researches, reflected in the judgments below in this case, and also in the judgments given in the Court of Appeal in NEC Semi-Conductors Ltd v Inland Revenue Commissioners [2006] STC 606 (especially Mummery LJ at paras 163-175). It is nevertheless an unwelcome task. The Law Commission has recently expressed the view (Pre-Judgment Interest on Debts and Damages Law Com. No. 287, para 1.15) that:
“The current system of awarding interest is muddled and out-of-date. It is difficult to justify to litigants, and gives the impression that the legal system is living in the past.”
There are also some pertinent observations by Lord Goff of Chieveley in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 684 (“Westdeutsche”):
“One would expect to find, in any developed system of law, a comprehensive and reasonably simple set of principles by virtue of which the courts have power to award interest … . Sadly, however, that is not the position in English law.”
In his opinion Lord Nicholls has traced the history of the rule in Page v Newman (1829) 9 B&C 378 since it was first stated, in wide and blunt terms, by Lord Tenterden CJ (at 380):
“It is a rule sanctioned by the practice of more than half a century, that money lent does not carry interest.”
My noble and learned friend has described how this questionable rule survived reviews by this House in London, Chatham and Dover Railway Co v South Eastern Railway Co. [1893] AC 429, La Pintada [1985] 1 AC 104 and Westdeutsche [1996] AC 669, but has been progressively eroded by statutory intervention and by judicial recognition that the rule does not exclude the award of interest as special damages. The point was aptly expressed by Ward LJ in Hartle v Laceys [1999] Lloyds Reports PN 315, 327:
“The issue here is not about interest on damages but about interest as damages.”
The thrust of Lord Nicholls’ observations on interest benefits and restitution (paras 101 et seq of his opinion) might be encapsulated similarly as being ‘not about interest on restitution but about interest as restitution.’
I respectfully agree with Lord Nicholls that the distinction which Lord Brandon drew in La Pintada between damages under the two limbs in Hadley v Baxendale (1854) 9 Exch 341 is unsound, and should no longer be used (see the observations of Mason CJ and Wilson J in the High Court of Australia in Hungerfords v Walker (1989) 171 CLR 125, 141-142). I cannot usefully add anything about interest as damages. But I wish to add something about interest on (or as) a restitutionary award.
Interest in Unjust Enrichment
It is a topic which has until recently attracted relatively little attention from English restitution scholars. The most extensive treatment may be the chapter entitled “Interest” by Professor Francis Rose in Birks & Rose, eds. Lessons of the Swaps Litigation, (2000) pp291-328. There is also a useful survey by Professor Andrew Burrows in his The Law of Restitution (2nd ed, 2002) pp53-56. English and Australian authorities on the topic are considered in chapter 28 of Mason & Carter, Restitution Law in Australia (1995) pp945-967, and in part 1 of Edelman and Cassidy, Interest Awards in Australia (2003) pp92-115. Like Lord Hope I have been assisted by an article by Steven Elliott, “Rethinking Interest on Withheld and Misapplied Trust Money” (2001) 65 Conv.313. I gratefully acknowledge my debt to all these materials.
If Moses v Macferlan (1760) 2 Bur 1005 is recognisably the first leading case in English restitution law, then the first monograph on English restitution law can probably be identified as the work by Sir William Evans entitled “An Essay on the Action for Money Had and Received”. It was published in 1802 and dedicated to Sir Edward Law (later Lord Ellenborough). It is reprinted in [1998] RLR 3. In its opening paragraphs, Evans identified the subject-matter of his study as
“the action for money had and received, as enforcing an obligation to refund money which ought not to be retained.”
Evans quoted as a “proper introduction” to the subject the famous passage from the judgment of Lord Mansfield CJ in Moses v Macferlan (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 for money 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 honour 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 implied) or extortion; or oppression; or an undue advantage taken of the plaintiff’s 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.”
The last chapter (IX) of the essay is concerned with damages (which must be understood as meaning restitutionary awards). It provides a convenient starting-point for considering interest on restitutionary awards. After referring to Dutch v Warren (1721) (best reported within Moses v Macferlan (1760) 2 Burr 1005, 1010) Evans stated:
“And it has been very lately determined, that in an action for money had and received, the plaintiff can recover nothing but the net sum received without interest. Walker v Constable (1798) 1 Bos & Pul 306.
It seems however difficult to reconcile these two decisions, more especially the last, to the principles of general reasoning. Where one party, by his refusal to complete a contract, gives the other a right to treat the contract as [a] nullity; why should that right, which is allowed in its nature, be restricted in its extent?
And though a recovery of incidental damages for the non-performance of a contract, would be repugnant to the nature of an action founded upon the disaffirmance of such contract, it is by no means a necessary consequence of that principle, that damages should not be allowed in respect of the interest of the money improperly detained; and this observation, in respect of the action, as it is brought for restitution of money unduly paid, and which is founded upon a legal fiction, will be more forcible where the allegation, which is commonly formal, is literally true: when money is actually received by one man for the use of another, and instead of being paid over, is placed at interest, or employed in business: but if there is a technical rule which governs the action in general, it would be incorrect to dispense with the application of it in particular cases.”
Walker v Constable (1798) 1 Bos & Pul 306 was a claim for the return (with interest) of a deposit paid under an abandoned contract. The relevant part of the report of the decision of the Court of Common Pleas is as follows (at p 307):
“Buller J, that the plaintiff might perhaps be entitled to recover interest under the count for money had and received.
Adair having again mentioned the case this day,
The Court were of opinion, on the authority of Moses v Macferlan 2 Bur 1005, that in an action for money had and received the Plaintiff could recover nothing but the net sum received without interest.”
In Moses v Macferlan, Lord Mansfield did not make any reference to interest as such. But the report shows that he was presented with arguments that the count for money had and received (which was, for procedural reasons, a popular form of action) should not be extended too far. In that context he explained (at p 1010) that the count for money had and received had advantages for the litigants on both sides:
“One great benefit, which arises to suitors from the nature of this action, is, that the plaintiff needs not state the special circumstances from which he concludes ‘that, ex aequo et bono, the money received by the defendant, ought to be deemed as belonging to him:’ he may declare generally ‘that the money was received to his use;’ and make out his case, at the trial.
This is equally beneficial to the defendant. It is the most favourable way in which he can be sued: he can be liable no further than the money he has received; and against that, may go into every equitable defence, upon the general issue; he may claim every equitable allowance; he may prove a release without pleading it; in short, he may defend himself by everything which shews that the plaintiff ex aequo et bono, is not entitled to the whole of his demand, or to any part of it.”
Mr Rabinowitz submitted that Lord Mansfield’s reference to the defendant being liable “no further than the money he has received” did no more than exclude any consequential loss. The fact that the judgment went on to refer to Dutch v Warren supports this. In any case the practice of not awarding interest on the count for money had and received seems to have been partly procedural. It was also strongly influenced by the rule in Page v Newman, under which the Court looked for an express or implied term as to interest. This appears from de Havilland v Bowerbank (1807) 1 Camp 50 where the report shows that the point was reconsidered by Lord Ellenborough at the instance of the Attorney-General (at p 52):
“Lord Ellenborough said, that the rule proposed, of considering how far the plaintiff was damnified was so wide, that it would let in interest in almost every case, and it afforded no assistance in drawing a line between cases where interest should be allowed, and where it should be refused. If the party lost the use of his money, it was his own fault in not suing for it. He thought, that where money of the plaintiff had come to the hands of the defendant, to establish a right to interest upon it, there should either be a specific agreement to that effect, or something should appear from which a promise to pay interest might be inferred, or proof should be given of the money being used.”
The same rule was reaffirmed by Tindal CJ and the other judges of the Court of Common Pleas in Fruhling v Schroeder (1835) 2 Bing (NC) 78. Again the rule in Page v Newman (although not mentioned as such) seems to have been decisive (at p.79):
“The rule has been laid down in so many cases, that interest cannot be recovered unless it be expressly reserved by the contract between the parties, or the payment of it is to be implied from the course of dealing between them, that it is unnecessary to refer to them.”
A similar approach was taken in an early 20th century appeal to the Privy Council from Sierra Leone, Johnson v The King [1904] AC 817. Johnson was a contractor who had grossly overcharged the government for his services in moving granite to a naval installation in Freetown. He presented vouchers for moving over 4,000 tons of granite when he had actually moved less than 450 tons. He was sued for the amount overpaid, a sum of just over £8,000, together with interest. But although he had by then been prosecuted, convicted and imprisoned, and though fraud was pleaded in the civil claim, at trial the case was not rested on fraud. The Privy Council held that that was fatal to the claim for interest (Johnson had paid into court the principal sum claimed). Lord Macnaghten stated (at p.821):
“The learned counsel for the defendant pointed out that fraud had not been proved in the action. But the learned judge held that it was unnecessary to go into that point, as the defendant admitted ‘receiving the money by mistake or as overpayment.’ Consequently he thought the law would ‘imply a promise from defendant to pay back to the plaintiff the money paid in excess.’ He thought the allegation of special damage in the statement of claim sufficient, and gave ‘judgment for the plaintiff for £428.13s.3d. damages by way of interest without costs.’
Having regard to the law as settled by the judgment of the House of Lords in the case of London, Chatham and Dover Ry Co v South Eastern Ry Co it is impossible to support the decision of the Acting Chief Justice on the ground upon which it was rested.”
Again, a principle applicable to contractual debts was being applied to a restitutionary claim, because it was treated as quasi-contractual in nature (this point is well made in Edelman and Cassidy Interest Awards in Australia, part 1 p 93).
My Lords, the constant search, in these old cases, for an express or implied term as to interest reflects the fact that unjust enrichment was for a very long time regarded as a sort of appendage to the law of contract. That is how Lord Mansfield put it in Moses v Macferlan (1760) 2 Bur 1005, 1008,
“If the defendant be under an obligation, from the ties of natural justice, to refund; the law implies a debt, and gives this action, founded in the equity of the plaintiff’s case, as it were upon a contract (‘quasi ex contractu,’ as the Roman law expresses it).”
It was therefore natural that the rule as to interest on contractual debts should be applied to restitutionary awards. The term “quasi-contract” should not have survived Lord Wright’s great speech in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, 61, though in fact it lingered on for another generation.
It may have received its final quietus with the judgment of Robert Goff J in BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783 (upheld by this House [1983] 2 AC 352). In his judgment Robert Goff J, as well as restating the principles underlying unjust enrichment, decided that the wording of section 3(1) of the Law Reform (Miscellaneous Provisions) Act 1934 was wide enough to include interest on restitutionary awards, so that there is a statutory power (now found in section 35A of the Supreme Court Act 1981) to award simple interest, at the Court’s discretion, on a restitutionary award. That was plainly a step forward, but it may have distracted attention from considering where (apart from statute) restitutionary interest stood once unjust enrichment had been set free from the fettering fiction of quasi-contract.
The Court of Chancery was more generous in giving interest on restitutionary awards, as appears from the judgment of Malins VC in In re Maria Anna and Steinbank Coal and Coke Company (McKewan’s case) (1877) 6 Ch D 447, 455-456 (upheld by the Court of Appeal, without a reasoned judgment on this point, at p 462). Interest was ordered as of course against a fiduciary agent who failed to account (Harsant v Blaine, Macdonald & Co (1887) 56 LJQB 511, followed by the High Court of Australia in Bayne v Stephens (1908) 8 CLR 1). But at equity too there were anomalies: in particular a personal restitutionary claim to recover a mistakenly paid legacy seems not to have carried interest, although a proprietary restitutionary claim did so: see Re Diplock; Diplock v Wintle [1948] Ch 465, 506-507 (following, on the personal claim, Gittins v Steele (1818) 1 Swanst 199, a decision of Lord Eldon LC) and at 558 (on the proprietary claims). Gittins v Steele was discussed by Lord Goff and Lord Woolf in Westdeutsche [1996] AC 669, 694, 730.
In short the state of English law as regards interest in respect of restitutionary claims (considered as a genus) has been at least as confused as that in respect of compensatory claims. It is regrettable that (for reasons adverted to by my noble and learned friend Lord Mance, whose opinion I have had the advantage of reading in draft) the whole subject was not more fully investigated in Westdeutsche. In the event, this House’s decision to depart from Sinclair v Brougham [1914] AC 398 (a possibility not even hinted at, so far as I can see, in the Court of Appeal [1994] 1 WLR 938) threw the argument on interest into disarray, and the three members of the House who decided not to develop the equitable jurisdiction to award interest relied strongly on the absence of full argument (see Lord Browne-Wilkinson at p 718, Lord Slynn of Hadley at pp 718-719 and Lord Lloyd of Berwick at pp 738-739).
The crucial insight in the speeches of Lord Nicholls and Lord Hope is, if I may respectfully say so, the recognition that what Lord Nicholls calls income benefits are more accurately characterised as an integral part of the overall benefit obtained by a defendant who is unjustly enriched. Full restitution requires the whole benefit to be recouped by the enriched party: otherwise “the unravelling would be partial only” (Lord Nicholls in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] 1 WLR 1627, 1637).
That was a case where money paid in damages had to be refunded in consequence of an appellate judgment. The same principle has been applied by differently constituted divisions of the Court of Appeal of New South Wales and by the Full Court of the Supreme Court of South Australia (Heydon v NRMA Ltd (No 2) (2001) 53 NSWLR 600; Roads and Traffic Authority v Ryan (No 2) [2002] NSWCA 128 (16 May 2002); Cornwall v Rowan (No 2) [2005] SASC 122 (1 April 2005)). In the first of these cases Mason P (at pp 604-606) cited from his judgment in National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (23 April 1997, unreported). Having set out a long catalogue of cases in which the London, Chatham rule had been bypassed, Mason P continued:
“Passing London, Chatham like ships in the night, these cases proceeded upon the obvious principle that, when A retains money owned by or owing to B over a period of time, A derives a benefit (at B’s expense) usually measurable by what A would have had to pay in the market to borrow that sum for that period. Since this benefit is derived without justification and at the expense of the person to whom the principal sum was due, we should now recognise it as an unjust enrichment. It stands independently of, but appurtenant upon the obligation to pay, the ‘principal’ sum.”
He also noted the doubts as to a “free-standing” right to interest expressed in the High Court in Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285, 316-7.
I wish to add a word about terminology. In the course of argument the expression ‘disgorgement interest’ was frequently used, sometimes (if I understood counsel correctly) as a synonym for restitutionary interest, sometimes as a species of restitutionary interest, and sometimes in contrast to restitutionary interest. It is hard to make progress through that sort of confusion. There is a clear need for a vocabulary, generally understood and accepted, to distinguish between (1) proprietary claims which may involve tracing in equity (as in Attorney General for Hong Kong v Reid [1994] 1 AC 324); (2) personal claims for an account of profits (that is, for a sum equal to the profits actually made by the defendant); and (3) personal claims for interest which represents (in a more or less conventional way) the benefit which the defendant is presumed to have derived from money in his hands.
The ECJ judgment in Hoechst
In his opinion Lord Hope has fully analysed the effect of paragraphs 77 to 96 of the judgment of the ECJ in Hoechst [2007] Ch 620. I respectfully agree with his analysis. While leaving causes of action and remedies to the national court, the ECJ has made clear that the national court must award an effective remedy. The ECJ emphasised (para 88) that
“in an action for restitution the principal sum due is none other than the amount of interest which would have been generated by the sum, use of which was lost as a result of the premature levy of the tax.”
Without referring in terms to La Pintada [1985] AC 104, it made clear that the rule in that case must not be applied.
Similarly in the paragraphs of its judgment dealing with a compensatory award the ECJ distinguished (para 93) R v Secretary of State for Social Security, Ex p Sutton (Case C-66/95) [1997] ICR 961 as a case where entitlement to interest was not an essential component of the claimant’s right, stating that:
“in the present cases, it is precisely the interest itself which represents what would have been available to the claimants, had it not been for the inequality of treatment, and which constitutes the essential component of the right conferred on them.”
Instead it compared the cases with Marshall v Southampton and South West Hampshire Area Health Authority (Teaching) (No 2) (Case C-271/91) [1994] QB 126, in which the requisite full compensation had to include an allowance for the time value of money. This case is even stronger because the time value element is not ancillary but absolutely central to the claim.
Conclusions
The judgment of the ECJ is in my opinion a powerful encouragement for this House to reconsider the basis on which a monetary award reversing unjust enrichment can and should take account of the time value of money. In modern economic conditions simple interest does not provide full compensation in a case where unjust enrichment has lasted for a significant period (a fact which is now reflected, as Lord Hope points out, in the practice of the European Commission). As Hobhouse J said in Westdeutsche at first instance, [1994] 4 All ER 890, 955,
“Simple interest does not reflect the actual value of money. Anyone who lends or borrows money on a commercial basis receives or pays interest periodically and if that interest is not paid it is compounded (eg Wallersteiner v Moir No 2 [1975] QB 373 and National Bank of Greece SA v Pinios Shipping Co, The Maira [1990] 1 AC 637). I see no reason why I should deny the plaintiff a complete remedy or allow the defendant arbitrarily to retain part of the enrichment which it has unjustly enjoyed.”
Hobhouse J was of course delivering his judgment before this House decided not to follow Sinclair v Brougham [1914] AC 398, and so at a time when there appeared to be an indisputable equitable jurisdiction to award compound interest in a case of this sort. The House’s decision in Westdeutsche could be distinguished (except in relation to those cases, mentioned in para 33 of Park J’s judgment, where amounts of ACT were actually repayable as principal sums) on the basis that in Westdeutsche the House was not concerned (or at any rate did not perceive itself as concerned) with a case where part of the principal sum had been repaid before issue of the writ (in fact the position was more complicated, as the Court of Appeal pointed out in IM Properties plc v Cape & Dalgleish [1999] QB 297 at pp 305 (Waller LJ) and 308 (Hobhouse LJ)). But such a distinction would be anomalous and might be thought to leave the law in an even less satisfactory state.
Lord Nicholls and Lord Hope propose to cut through the thicket of problems by recognizing a restitutionary remedy available as of right at common law, subject to the Court’s power to resort to “subjective devaluation” in order to avoid injustice in hard cases. This would be following a course which, in Westdeutsche, was not so much rejected as assumed not to be open. I must confess that my own inclination would be to take the course which this House came very close to taking, but ultimately drew back from taking, in Westdeutsche: that is to extend the court’s equitable jurisdiction to award compound interest. Before your Lordships the law has been much more fully investigated, and in my opinion there are compelling reasons for departing from Westdeutsche, and recognising the force of Lord Goff’s and Lord Woolf’s powerful dissenting speeches in that case.
Both Lord Goff [1996] AC 669, 695-697 and Lord Woolf (at 721-723) saw their preferred solution as an extension of equity’s auxiliary jurisdiction in order to make good the inadequacy of a common law remedy. That would in my opinion be a principled development in the still-evolving relationship between equity and the common law (see Professor Andrew Burrows, “We Do This at Common Law but That in Equity” (2002) 22 OJLS 1). It would be a further and permissible step in the progress which this House has made towards developing what Lord Goff (in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, 372G) referred to as “a coherent law of restitution.”
In Westdeutsche Lord Goff and Lord Woolf both considered (at 691 and 723 respectively) that on the facts of that case compound interest was required in order to achieve complete restitution and reverse unjust enrichment. Lord Woolf recognised (at 722) that the exercise of the auxiliary jurisdiction would (as with all equitable remedies) be discretionary, and (at 724) that compound interest should not be awarded if the facts were such that the defendant would not have earned compound interest. Awards of simple interest under section 35A of the Supreme Court Act 1981 are also discretionary, but the Court’s exercise of its discretion causes few difficulties in practice. In my opinion this is clearly a case in which compound interest should be awarded, since (i) it is a case where Community law requires full restitution; (ii) the defendant is economically powerful and sophisticated and must be supposed (as the agreed “conventional basis” seems to recognise) to have taken full advantage of its premature receipts of ACT; and (iii) it is not suggested that the claimant has been at fault or has been dilatory in making or pursuing its claim.
I feel some apprehension about the suggested conclusion that compound interest should be available as of right, subject only to an exception for “subjective devaluation,” a concept normally applicable to benefits in kind (see Birks, An Introduction to the Law of Restitution, revised 1989 edition p.109, quoting Robert Goff J in BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783, 799). It is true that the time value of money (as opposed to money itself) may be regarded as a “non-money benefit”, as Birks does in Unjust Enrichment, 2nd ed. P.53. But it is a benefit which can readily be quantified in money terms; that has been, for many centuries, the function of interest. The discretionary nature of an equitable award of interest provides the necessary flexibility, though I would expect the principles for the exercise of the discretion to develop along familiar and predictable lines.
In this case either the common law route or the equitable route leads to the same conclusion. The appropriate exercise of discretion is to order the Revenue to pay compound interest at a conventional rate calculated by reference to the average cost of government borrowing during the relevant period. I would therefore dismiss the appeal and make the order proposed by Lord Hope.
LORD MANCE
My Lords,
Introduction
This is a further appeal in the series relating to advance corporation tax (“ACT”). It has involved two hearings, one of two days in November 2006 and a further day’s hearing at the House’s request in May 2007. ACT was until 5th April 1999 levied under s.14 of the Income and Corporation Taxes Act 1988. But it was held by the European Court of Justice in Joined Cases C-397/98 and C-410/98, Metallgesellschaft Limited and Others v. Commissioners of Inland Revenue and HM Attorney General [2001] Ch 620, to discriminate unlawfully against companies with parents resident in other Member States. Lord Hoffmann, in Deutsche Morgan Grenfell Group Plc v. H. M. Inland Revenue Commissioners [2006] UKHL 49, [2007] 1 AC 558 described the conceptual basis of ACT:
“3. ….. The tax ….. was in theory corporation tax payable in advance of the date on which it would otherwise have been payable. A company resident in the United Kingdom pays corporation tax on profits arising in a given accounting period and, generally speaking, the tax is payable nine months after the period ends. But the trigger for the payment of [advance] corporation tax was the payment of a dividend. A company which paid a dividend became liable to account to the Inland Revenue for ACT calculated as a proportion of the dividend. This could afterwards be set off against the corporation tax (‘mainstream corporation tax’ or ‘MCT’) which became chargeable on its profits. The revenue thereby obtained early payment of the tax and, in cases in which the company’s liability for MCT turned out to be less than it had paid as ACT, payment of tax which would not otherwise have fallen due.
4. The rule that ACT was payable on dividends was however subject to an exception if the dividend was paid to a parent company in the same group. Under section 247 of the Income and Corporation Taxes Act 1988 the company and its parent could jointly make a group income election which gave them the right to be treated for the purposes of ACT as if they were the same company. No ACT would be payable on the distribution by the subsidiary. It would however be payable on any distribution by the parent. The Act confined the right of election to cases in which the parent was resident in the United Kingdom. Otherwise a subsidiary which had elected would not be liable to ACT and the parent, being non-resident, would not be liable either.
5. In the Metallgesellschaft Hoechst case the Court of Justice decided that these arrangements infringed the right of establishment guaranteed by article 52 (now 43) of the EC Treaty in that they discriminated against companies resident in other member states. It held that the companies which had been unlawfully required to pay ACT were entitled to restitution or compensation. The nature of the remedies, the procedures by which they could be enforced and matters like the appropriate limitation periods were said to be matters for domestic law. The only specific qualification imposed by the Court of Justice was that English courts could not apply the rule in the The Pintada (President of India v La Pintada Cia Navigacion SA [1985] AC 104) to deny any recovery of interest to a claimant whose ACT had been set off against MCT before the commencement of proceedings. The claimant was entitled to be compensated for loss of the use of the money between the date on which it was paid and the date when MCT became due. ….”
The issue now is whether a company unlawfully required to pay ACT is entitled, under European or domestic principles, to interest for the loss of use of money on a compound or only a simple interest basis. Under a Group Litigation Order made 26th November 2001, Sempra Metals Limited (“Sempra”), as Metallgesellschaft Limited is now known, is a test claimant for the determination of this issue, and four sample dividends have been identified for consideration. Their relevant details are as follows:
Dividend Payment Date Dividend Amount (£) ACT Payment Date ACT Amount (£) Set off Date Set off Amount (£)
23/7& 21/9/81 2.5m 12/10/81 1,071,428.57 1/7/90 1/7/91 a) 259,206 b) 812,223
4/1/85 2.0m 10/4/85 808,625.00 1/7/94 808,625.00
4/4/89 1.8m 10/7/89 369,143.12 1/7/94 369,143.12
25/5/94 21.0m 18/7/94 3,230,002.49 1/7/95 1/7/96 a) 1,665,358 b)1,563,644.19
As the table shows, often very substantial periods of years passed before Sempra was able to set off the ACT payments which the 1988 Act called upon it to make. Sempra started the present proceedings by writ issued 6th March 1996, by when Sempra had not been able to set off the whole of its fourth payment of ACT, although it was able to do so shortly afterwards. But the only claim made in the present proceedings relates to the periods prior to set off. The claim as pleaded is for damages to compensate for the loss of use of the ACT or, by later amendment, for restitution in respect of the loss of use of the ACT during such periods. The course of argument before the House led Sempra to reformulate the latter claim as a claim for the benefit, actual or notional, obtained by the Revenue by having the use of the money.
Both Park J ([2004] EWHC 2387 Ch); [2004] STC 1178 and the Court of Appeal, consisting of Chadwick, Laws and Jonathan Parker LJJ, ([2005] EWCA Civ 389; [2005] STC 687) held that Community law, and in particular the principles laid down by the European Court in the Metallgesellshaft case, require English domestic courts to give a full remedy or full compensation in order to restore equal treatment and that only an award of compound interest would fully achieve this. Park J accepted a submission by the Inland Revenue that such interest should be calculated on a “conventional basis”, that is by fixing a single market-based rate for all claimants, irrespective of whether they were net borrowers or depositors and of any actual rates at which they borrowed or lent (paragraphs 18 to 22). On this last point his decision was not appealed, but Chadwick LJ giving the only full judgment in the Court of Appeal commented that “if the matter is to be approached on the basis of ‘one rate suits all’, then (as it seems to me) there is really no alternative to adopting a borrower’s rate rather than a lender’s rate” (paras. 50-52). The Court of Appeal added the rider that interest should be computed by compounding at the same periodic rests as those to reference to which the applicable rate was fixed (para. 54).
Against the award of compound interest the Revenue now appeals. The Revenue submits that the remedy to be provided in respect of ACT payments made under the discriminatory legislative scheme identified by the European Court in the Metallgesellschaft case depends on English domestic law. It submits that, whatever form the remedy takes under English domestic law, only simple interest is recoverable, but that, if this is wrong, distinctions should be drawn between the various remedies. Unfortunately, until the submissions before the House, no such distinction appears to have been suggested (cf paragraph 11 of Park J’s judgment), but the matter is one of pure law. Three possible domestic remedies exist: (a) a claim for damages for or analogous to breach of statutory duty or (b) a restitutionary claim based on or by analogy with the principle in Woolwich Equitable Building Society v. Inland Revenue Commissioners [1993] AC 70 and (c) a restitutionary claim based on or by analogy with the principle of mistake of law recognised in the House’s decisions in Kleinwort Benson Ltd. v. Lincoln C.C. [1999] 2 AC 349 and Deutsche Morgan Grenfell Group Plc v. Inland Revenue Commissioners [2007] 1 AC 558. Sempra, I understand, accepts that it would, before entry of any final judgment, have to elect between, on the one hand, the first and, on the other hand, the second and third remedies. I leave aside whether the second and third remedies may combine at some higher level of abstraction, such as absence of any basis for the payment or retention of the ACT. For domestic law purposes there is on any view a significant difference between them: the third remedy would, under section 32(1)(c) of the Limitation Act 1980, potentially postpone the commencement of the limitation period until the time when Sempra discovered or could with reasonable diligence have discovered that the ACT was not due. Sempra and other claimants intend to identify that time with the European Court of Justice’s decision on 8th March 2001 in the Metallgesellschaft case. Without such a postponement, interest losses prior to 6th March 1990 would on the face of it be time-barred, a matter of great relevance to ACT paid by Sempra on the first three sample dividends shown in the table above. If the third remedy proves available, Sempra will be likely therefore to elect for it, rather than for the first. Finally, the Revenue submits that, even if the nature of the interest awarded is a matter of Community law as the courts below considered, there is nothing in Community law to require or to make appropriate an award of compound interest.
The Metallgesellschaft case
I start with the European Court’s reasoning and decision in the Metallgesellschaft case [2001] Ch 620. The second question put by the High Court was
“(2) If the answer to question 1 is ‘no’ [i.e. if the legislative scheme regarding ACT was not consistent with the EC Treaty], do the above-mentioned provisions of the EC Treaty give rise to a restitutionary right for a resident subsidiary of a parent company resident in another member state and/or the said parent to claim a sum of money by way of interest on the [ACT] which the subsidiary paid on the basis that the national laws did not allow it to make a group income election, or can such a sum only be claimed, if at all, by way of an action for damages pursuant to the principles laid down by the Court of Justice in Brasserie du Pêcheur SA v Federal Republic of Germany; R v Secretary of State for Transport, Ex p Factortame Ltd (No 4) (Joined Cases C-46/93 and C-48/93) [1996] QB 404 and R v Secretary of State for Social Security, Ex p Sutton (Case C-66/95) [1997] ICR 961, and in either case is the national court obliged to grant a remedy even if under national law interest cannot be awarded (whether directly or by way of restitution or damages) on principal sums which are no longer owing to the claimants?”
The European Court’s answer in paragraph 96 and in its ruling was as follows:
“Where a subsidiary resident in one member state has been obliged to pay advance corporation tax in respect of dividends paid to its parent company having its seat in another member state even though, in similar circumstances, the subsidiaries of parent companies resident in the first member state were entitled to opt for a taxation regime that allowed them to avoid that obligation, article 52 of the Treaty requires that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they have sustained and from which the authorities of the member state concerned have benefited as a result of the advance payment of tax by the subsidiaries.
The mere fact that the sole object of such an action is the payment of interest equivalent to the financial loss suffered as a result of the loss of use of the sums paid prematurely does not constitute a ground for dismissing such an action.
While, in the absence of Community rules, it is for the domestic legal system of the member state concerned to lay down the detailed procedural rules governing such actions, including ancillary questions, such as the payment of interest, those rules must not render practically impossible or excessively difficult the exercise of rights conferred by Community law.”
This answer establishes the principles by reference to which English courts must approach Sempra’s claim. Domestic law is required to provide “an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they [in casu, Sempra] have sustained and from which the authorities of the member state concerned have benefited as a result of the advance payment of tax by [Sempra]”. The answer involves no requirement that the remedy should take any particular form, an impression confirmed by the following paragraph in the European Court’s reasoning:
“81. It must be stressed that it is not for the Court of Justice to assign a legal classification to the actions brought by the claimants before the national court. In the circumstances, it is for the claimants, to specify the nature and basis of their actions (whether they are actions for restitution or actions for compensation for damage), subject to the supervision of the national court.”
Nevertheless, Mr Rabinowitz QC for Sempra submits that the European Court determined, as a matter of Community law, that a remedy must be available in domestic law in both restitution and damages, and that in each case it must consist in allowing recovery of compound interest. He bases this submission on ensuing paragraphs of the European Court’s reasoning, which discuss the position firstly “on the assumption that the actions brought by the claimants ….. are to be treated as claims for restitution of a charge levied in breach of Community law” (paragraphs 82-89) and secondly “assuming that the claimants’ claims are to be treated as claims for compensation for damage caused by breach of Community law” (paragraphs 90-95). Again, on the face of it, the Court’s introduction to each of these sets of paragraphs indicates no more than an intention to discuss the two alternative possibilities envisaged in the bracketed phrase in paragraph 81. However, in paragraphs 82 to 89 the European Court rested its reasoning regarding restitution firmly on “well-established [European] case-law”, in terms which, it may be suggested, require a restitutionary remedy to be available. In my opinion, that would be a mistaken understanding of the Court’s actual or likely intentions. In paragraph 84, the Court was emphasising that, in circumstances like those under discussion, Community law requires there to be a (not any particular) right to a refund:
“84 According to well-established case law, the right to a refund of charges levied in a member state in breach of rules of Community law is the consequence and complement of the rights conferred on individuals by Community provisions as interpreted by the court: Amministrazione delle Finanze dello Stato v SpA San Giorgio (Case 199/82) [1983] ECR 3595, 3612, para 12; Barra v Belgian State (Case 309/85) [1988] ECR 355, 376, para 17; BP Supergas Anonimos Etairia Geniki Emporiki-Viomichaniki kai Antiprossopeion v Greek State (Case C-62/93) [1995] ECR I-1883, 1919, para 40; Dilexport Srl v Amministrazione delle Finanze dello Stato (Case C-343/96) [1999] ECR I-579, 610-611, para 23 and Kapniki Mikhailidis AE v Idrima Kinonikon Asphaliseon (Joined Cases C-441 and 442/98) [2000] ECR I-7145, 7176, para 30. The member state is therefore required in principle to repay charges levied in breach of Community law: Société Comateb v Directeur Général des Douanes et Droits Indirects (Joined Cases C-192-218/95) [1997] ECR I-165, 188, para 20; Dilexport, para 23 and Mikhailidis, para 30.
A reading of the cases cited in paragraph 84 shows the European Court consistently stating that “repayment may be sought only within the framework of the conditions as to both substance and form, laid down by the various national laws applicable thereto” (cf the San Giorgio case, para. 12) and in the Dilexport case, paras. 24-25 it stated that
“24 ……. the Court has also observed on several occasions that the problem of disputing charges which have been unlawfully claimed or refunding charges which have been paid when not due is settled in different ways in the various Member States, and even within a single Member State, according to the various kinds of taxes or charges in question. In certain cases, objections or claims of that kind are subject to specific procedural conditions and time-limits under the law with regard both to complaints submitted to the tax authorities and to legal proceedings. In other cases, claims for repayment of charges which were paid but not due must be brought before the ordinary courts, mainly in the form of actions for refund of sums paid but not owed, such claims being available for varying lengths of time, in some cases for the limitation period laid down under the general law (see, most recently, Case C-228/96 Aprile v Amministrazione delle Finanze dello Stato [1998] ECR I-7141, paragraph 17).
25 This diversity between national systems derives mainly from the lack of Community rules on the refund of national charges levied though not due. …..”.
The Court was also repeating its previous jurisprudence when it said in paragraph 85 of its present judgment that it is for the domestic legal system
“to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (principle of equivalence) and, secondly, that they do not render practically impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness) ….”.
In paragraph 86, the Court further stated that it was for national law
“to settle all ancillary questions relating to the reimbursement of charges improperly levied, such as the payment of interest, including the rate of interest and the date from which it must be calculated”.
In paragraphs 87 to 89 it reiterated why, in the circumstances of the present case, an award of interest is not an ancillary matter for the national court, but is required by Community law:
“87. In the main proceedings, however, the claim for payment of interest covering the cost of loss of the use of the sums paid by way of [ACT] is not ancillary, but is the very objective sought by the claimants’ actions in the main proceedings. In such circumstances, where the breach of Community law arises, not from the payment of the tax itself but from its being levied prematurely, the award of interest represents the ‘reimbursement’ of that which was improperly paid and would appear to be essential in restoring the equal treatment guaranteed by article 52 of the Treaty.
88. The national court has said that it is in dispute whether English law provides for restitution in respect of damage arising from loss of the use of sums of money where no principal sum is due. It must be stressed that in an action for restitution the principal sum due is none other than the amount of interest which would have been generated by the sum, use of which was lost as a result of the premature levy of the tax.
89. Consequently, article 52 of the Treaty entitles a subsidiary resident in the United Kingdom and/or its parent company having its seat in another member state to obtain interest accrued on the [ACT] paid by the subsidiary during the period between the payment of [ACT] and the date on which [MCT] became payable, and that sum may be claimed by way of restitution.”
Despite the language of “restitution”, the Court appears clearly to have been focusing throughout on Sempra’s loss of the money, rather than on any benefit that the Revenue may or may not have had from use of the money. Before the House, as I have said, Sempra’s attention shifted to the latter.
I do not read the concluding words of paragraph 89 as meaning that interest must be made available by way of restitution, but as meaning that, if the right to a refund of charges levied in a Member State in breach of rules of Community law is under national law provided by way of a restitutionary remedy, then that remedy must as a matter of Community law include a right to interest. In paragraphs 90 to 95, the European Court dealt with the alternative way in which a remedy might be provided, that is by an action for damages for breach of Community law. It pointed out that it had already held, in paragraph 87 of its judgment in Brasserie du Pêcheur SA v. Federal Republic of Germany; R v. Secretary of State for Transport, Ex p Factortame Ltd (No 4) (Joined Cases C-46 and 48/93); [1996] QB 404, 503, that
“total exclusion of loss of profit as a head of damage for which reparation may be awarded cannot be accepted in the case of a breach of Community law since, especially in the context of economic or commercial litigation, such a total exclusion of loss of profit would be such as to make reparation of damage practically impossible”
So it drew the conclusion that the remedy, if provided by way of an action for damages for breach of Community law, must also include a right to interest. I see no reason why the Court should have insisted that the domestic law remedy or right to interest required by Community law must be provided in both ways – that is both by way of restitution and by way of a claim for damages. It is necessary, but also sufficient, to provide it by one of the alternative routes that the Court was discussing.
The consideration that a restitutionary claim based on mistake of law might, if available, yield a much longer limitation period does not, in my opinion, bear on the effectiveness of the relief required by the European Court. The contrary was not suggested in the submissions put before the House. Time-limits for particular claims are par excellence a matter for domestic legislation and courts. Moreover, the appropriateness of an extended time limit in this context is questionable. Indeed, Lord Hoffmann in Kleinwort Benson [1999] 2 AC 349 recognised that “allowing recovery for mistake of law without qualification, even taking into account the defence of change of position, may be thought to tilt the balance too far against the public interest in the security of transactions”, adding that “The most obvious problem is the Limitation Act, which as presently drafted is inadequate to deal with the problem of retrospective changes in law by judicial decision” (p.401D-E). With effect from 8th September 2003 (and so not applicable to the subject-matter of this appeal), s.320 of the Finance Act 2004 in fact means that the provisions of s.32(1)(c) of the Limitation Act 1980 no longer apply to mistakes of law relating to a taxation matter under the care and management of the Revenue. So the existence of a six year limitation period in respect of any particular claim for damages or restitution does not mean that such claim would not be an effective remedy.
The requirement of an effective remedy in national law
I turn to the content of the requirement that national law should provide, in one form or another, an effective legal remedy. Both Park J and the Court of Appeal concluded that, whatever domestic law might otherwise provide, the reasoning in the Metallgesellschaft case required domestic law to make an award of compound interest. That was, in Park J’s opinion (paragraph 27), because “only compound interest will fully restore equal treatment” and, in Chadwick LJ’s words (paragraph 53), because English domestic rules of interest “must yield to the overriding requirement that the domestic court gives full compensation”. The European Court in the Metallgesellschaft case used the phrase “full compensation” in paragraph 94 in the context of consideration of its previous decision in Marshall v. Southampton and South West Hampshire Area H.A. (Teaching) (No. 2) (Case C-271/91) [1994] QB 126. It there held that a maximum limit on awards of £6,250 and the absence of a power to award interest in employment tribunal proceedings were inconsistent with the Equal Treatment Directive (76/207/EEC). As to interest, the Court said that, where financial compensation was the method adopted by national law to achieve the objective of equal treatment of men and women as regards employment, then
“it must be adequate, in that it must enable the loss and damage actually sustained as a result of the discriminatory dismissal to be made good in full in accordance with the applicable national rules” (paragraph 26)
and
“…. full compensation for the loss and damage sustained as a result of a discriminatory dismissal cannot leave out of account factors, such as the effluxion of time, which may in fact reduce its value. The award of interest, in accordance with the applicable national rules, must therefore be regarded as an essential component of compensation for the purposes of restoring real equality of treatment”. (paragraph 31)
The question whether interest should be compound or simple was not raised in Marshall, although the interest which the Industrial Tribunal had purported to award by analogy with the s.35A of the Supreme Court Act 1981 – and which the Employment Appeal Tribunal and Court of Appeal held that it had no power to award – must have been simple interest.
While an award of interest is an essential component of the “effective” legal remedy which national courts are bound to afford, I doubt whether this means, as a matter of Community law, that it is essential that there should be compounding. In an article On Interest, Compound Interest and Damages (1985) 101 LQR 30, 42-46, Dr F. A. Mann QC drew attention to the powerfully rooted objection to compound interest in many European jurisdictions, and in the USA. A Study on the conditions of claims for damages in case of infringement of EC competition rules dated 31st August 2004 prepared for the Commission by Messrs Ashursts noted that in the great majority of member states, interest awarded in such claims was not compounded. In Société Roquette Frères v. Commission of the European Communities (Case 26/74) [1976] ECR 677, cited by the European Court in paragraph 86 of its present judgment, the Court held that it was a matter for the discretion of the national court whether to make any award of interest ancillary to an order for the recovery of charges levied by the French State on the basis of a Commission regulation which was inconsistent with regulations made by the Council of Ministers. In its present judgment, the Court held that an award of interest was mandatory, because the claim for interest was the very objective sought by the proceedings, rather than ancillary. In Directive 2000/35/EC of 29 June 2000 on combating late payment in commercial transactions, the European Parliament and Council adopted a simple interest approach, but provided for a rate of 7% over the rate applied by the European Central Bank to its most recent main refinancing operation. In Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC) No 659/1999 and laying down detailed rules for the application of article 93 of the EC Treaty (which was aimed in cases of unlawful state aid at restoring the situation existing before the aid was unlawfully granted), the approach adopted was for the Commission to fix a recovery interest rate and for that rate to be compounded annually. Against this background, I doubt whether it can be said (or that the European Court would say) that national law would necessarily be failing to give an effective remedy, if, under national principles governing analogous domestic claims, simple rather than compound interest was the rule.
In the present case, Park J concluded that a single “conventional” market-based rate should, as a matter of Community law or alternatively under national law, be adopted (para. 22), and the Court of Appeal added the rider that it should be the borrower’s rate, compounded at the same periodic intervals as those by reference to which the rate was set. But this was on the basis that any recovery, whether by way of damages or on a “restitutionary” basis, should be measured by reference to Sempra’s loss, which is no longer Sempra’s position with regard to restitution.
In the light of the above it is necessary to consider English domestic legal principles governing interest. But this must be on the basis that it is not permissible for English law to decline to give any interest at all or to treat an award of interest as a purely discretionary matter (cf paragraphs 87-89 of the European Court’s judgment cited in paragraph 198 above and paragraph 5 of Lord Hoffmann’s judgment in the Deutsche Morgan case cited in paragraph 189 above). Neither approach would be consistent with the European Court’s conclusion that, because reimbursement or reparation in respect of the loss of use which Sempra has sustained and from which the Revenue has as a result benefited is the “very objective” or “sole object” sought by Sempra, English law must provide an (though not any particular) effective legal remedy in respect thereof.
Interest in English law
The attitude of English law to interest has been inhibited and undistinguished. As this appeal developed, the House was invited radically to reshape it. This is a not unattractive invitation. But we need to do so with some caution in the light of the last two hundred years of the law’s development. We must navigate using the reference points of precedent, Parliamentary intervention and analogy, and we should bear in mind the limitations of judicial knowledge and the assistance offered by a series of Law Commission reports.
Although old and in some respects unsatisfactory, the case-law of the late 18th and early 19th centuries remains the relevant backdrop. Neither in debt nor in a claim for money had and received could interest be recoverable (save where agreed or in the case of a negotiable instrument): cf Walker v. Constable (1798) 1 B & P 306, De Bernales v. Fuller (1810) 2 Camp. 426 and Depcke v. Munn (1828) 3 C & P 112 (all cases of claims for money had and received), and Page v. Newman (1829) 9 B & C 378 (interest not recoverable on loan not repaid when due). In Arnott v. Redfern (1826) 3 Bing 352, 359 Best CJ referred to the general rule that interest was not recoverable as one which
“wisely prevents acts of kindness from being converted into mercenary bargains, and makes it in the interest of tradesmen to press their customers for payment of their debts; and thereby checks the extension of credit, which is often ruinous to tradesmen and customers”.
But he suggested that interest might be recovered in a case of “unjust detention”, by which he meant wrongful refusal of payment after demand for payment. In Page v. Newman, Lord Tenterden CJ dismissed this suggestion, at p 381, on the basis that if there were such a rule “it might frequently be made a question …. whether the proper means had been used to obtain payment of the debt”, which “would be productive of great inconvenience” and the court ought not to depart from the “long-established” contrary rule.
In London Chatham and Dover Railway Company v. South Eastern Railway Company [1893] AC 429, 438 the House discounted as not “very satisfactory” rules (the last, that interest might be recovered where proof was “given of the money being used”) suggested by Lord Ellenborough in De Havilland v. Bowerbank (1807) 1 Camp. 50, 52 (another claim for money had and received). The Act then promoted by Lord Tenterden in 1833 (3 & 4 Wm. 4, c. 42) introduced only a very limited extension of the circumstances in which interest might be recovered. Under s. 28 interest might on the trial of any issue or on any inquisition of damages be allowed, if thought fit, but only on “debts or sums certain …. payable by virtue of some written instrument at a certain time, or if payable otherwise, then from the time when demand of payment shall have been made in writing” giving “notice to the debtor that interest will be claimed from the date of such demand”. S. 29 also permitted an award of damages in the nature of interest on the value of goods in actions of trover or trespass de bonis asportatis.
Claims in debt and for money had and received were thus treated together in the early authorities, and it is I think clear that the wording of Lord Tenterden’s Act covered both. This was indeed assumed by counsel in argument in Fruhling v. Schroeder (1835) 2 Bing (NC) 78, 80, where Tindal CJ held, following the early decisions, that “in money had and received, the net sum only can be recovered”. The decisions of Brandon J in The Aldora [1975] QB 748 and Robert Goff J in B. P. Exploration Co. (Libya) Ltd. v. Hunt (No 2) [1979] 1 WLR 783, 835-7, affirmed in this House at [1983] 2 AC 352, 373-4, that restitutionary claims fell within the replacement 1934 Act were not revolutionary; the second case merely concerned a particular problem about bringing a claim under the Law Reform (Frustrated Contracts) Act 1943 within the statutory language.
I am unpersuaded by the academic suggestion (Edelman & Cassidy, Interest Awards in Australia (2003), Chap. 5, p. 93) that the law’s attitude to interest in claims for money had and received was shaped by the fiction that such claims arose “as it were upon a contract”. The full passage from Lord Mansfield’s judgment in Moses v. Macferlan (1760) 2 Burr 1005, 1008 indicated where “the defendant be under an obligation, from the ties of natural justice, to refund”, then “the law implies a debt, and gives this action, founded in the equity of the plaintiff’s case, as it were upon a contract (‘quasi ex contractu’, as the Roman law expresses it)”. Lord Mansfield went on carefully to distinguish the features of claims in contract and for money had and received, and showed that he were well aware of the different considerations actually underpinning these different claims, consensus on the one hand and natural justice or equity in a broad sense on the other. It seems to me that the law’s attitude to interest was shaped not by conceptual confusion, but by policy-driven concerns (however debatable) regarding interest which may well have had historical roots, and which find an echo to this day in modern legislation and Law Commission reports (including their most recent report Pre-judgment Interest on Debts and Damages dated 23 February 2004, (Law Com No 287) where it shaped their recommendations: cf especially at paras. 5.15 through 5.40). They also found an echo in the speech of Lord Lloyd of Berwick in Westdeutsche Landesbank Girozentrale v. Islington London BC [1996] AC 669, 741A-F.
The legal position after Lord Tenterden’s Act was considered in the London, Chatham and Dover case [1893] AC 429, where De Havilland, Arnott v. Redfern and Page v. Newman were examined. On the facts, the Act was inapplicable, and the House held, with some regret, that no claim could be made by the plaintiffs at common law “by way of damages in respect of the wrongful detention of their debt” (per Lord Herschell LC at p.437). Lord Herschell thought that the limits imposed by the Act “seem to be too narrow for the purposes of justice”. But having regard to Page v. Newman “and to the statute passed subsequently with obvious reference to it by the Legislature”, and the absence since that time” of any contrary case he did not “think it would be possible nowadays to reopen the question, even in this House, and to hold that interest under such circumstances could be awarded” (pp.440-1). Lord Shand regretted that English law was not like the law of Scotland where “it is the common and ordinary practice, in bringing an action for money which is due, to conclude not only for the payment of that money but for the payment of interest upon it from the date of citation or service of the summons, and interest is decreed as a matter of course on whatever balance is found to be due” (p. 443). But I note that Lord Shand spoke of interest only from citation or service, and also of an award that would, I understand, be of simple, not compound interest. In Johnson v. The King [1904] AC 817 the Privy Council held, consistently with the above, that, fraud aside, interest could not be recovered in law or equity on monies recoverable as having been paid under a mistake. But it was submitted to the Board in support of an award of interest that “Johnson, who was a trader, must have made a profit by the use of the money which was in his hands for a year”, and the way in which the Board dealt with this submission is of some interest, viz: “That is very probable, but there is no proof of it” (p. 822). The case was one where the monies received were paid into court, and accepted in partial satisfaction of the claim, during the proceedings for their recovery, but the plaintiff had continued to trial to seek interest as “special damage for the loss of use of the money during the periods of detention”.
In 1934 s.3(1) of the Law Reform (Miscellaneous Provisions) Act 1934 gave effect to the recommendations on interest in the Second Interim Report of a distinguished Law Revision Committee, chaired by Lord Hanworth MR (Cmd 4546). The Act expanded the circumstances in which interest might be awarded, to provide for the discretionary award of simple interest on any debt or damages for which judgment was given by a court. In June 1978 the Law Commission issued a Report on Interest (Law Com No 88; Cmnd. 7229) which recommended, first, a general rule that contract debts (but not “debts due in quasi-contract”) should carry simple interest at a statutory rate (paras. 218 and 221), and, second, that the provisions of the 1934 Act should be replaced by a wider discretionary power for the court in any proceeding for debt or damages to award simple interest in respect of sums recovered or paid without a trial or before judgment (paras. 236-9).
Parliament adopted only the second recommendation when in 1982 it replaced the provisions of the 1934 Act with s. 35A of the Supreme Court Act 1981. In the meanwhile, there had been a common law development. Building on remarks of Lord Denning in Trans Trust Sprl v. Danubian Trading Co. Ltd. [1952] 2 QB 297, the Court of Appeal in Wadsworth v. Lydall [1981] 1 WLR 598 allowed recovery of interest as “special damages” for failure to pay £10,000 to complete an agreement to dissolve a partnership. On the strength of the agreement, the claiming partner had committed himself to complete a purchase of another property which he was unable to complete on time, so becoming liable to pay his seller the interest for non-completion.
In the President of India v. La Pintada Co. Nav. SA [1985] AC 104, the House re-affirmed the principle in the London Chatham case. Lord Brandon of Oakbrook (in a speech with which all other members agreed) observed in passing that the London, Chatham and Dover decision “was regarded as applying to any form of damages” (cf p.115F). However, he identified some common law exceptions, as well as the statutory interventions discussed above. One exception was Admiralty law, under which simple interest had been awarded on damages recovered in a damage action for more than a century and on sums recovered in a salvage action since 1975, and it had been assumed, he said, that interest would likewise also be recovered in an action for a contractual debt (p.115G-H). Another was equity, in which Chancery courts regularly awarded simple interest in respect of equitable remedies “such as specific performance, rescission and the taking of an account”, and compound interest was awarded “when they thought that justice so demanded, that is to say in cases where money had been obtained and retained by fraud, or where it had been withheld or misapplied by a trustee or anyone else in a fiduciary position” (p.116A-B). Lord Brandon also identified and approved the “important judicial inroad into the previously accepted understanding of the scope of the decision” made in Wadsworth v. Lydall (p 125G-H).
The House revisited the topic in President of India v. Lips Maritime Corporation [1988] AC 395, where a claim for a currency exchange loss through late payment of demurrage failed on the straightforward basis that demurrage is liquidated damages, and the law knows no such thing as a claim for damages for failing to pay damages. Lord Brandon, in a speech with which three other members of the House agreed, again considered the scope of the London, Chatham and Dover case at p.424B-G and indicated that (despite the understanding about its application to “any form of damages” – cf paragraph 213 above) its scope is strictly confined to claims to recover interest as damages for late payment of a debt. Claims for other losses (such as exchange losses) by way of damages for late payment of a debt differed significantly because there was no “previously established law comparable to that laid down in the London, Chatham and Dover …. case” and “no statutory provisions …. which could conflict with any right of recovery at common law” (p. 424D). Accordingly “claims to recover currency exchange losses as damages for breach of contract, whether the breach relied on is late payment of a debt or any other breach, are subject to the same rules as apply to claims for damages for breach of contract” (p.424E).
As my noble and learned friend, Lord Nicholls of Birkenhead, points out in his opinion at paragraphs [85 to 89], it is difficult to follow or accept Lord Brandon’s explanation of the term “special damages” by reference to the second rule in Hadley v. Baxendale (1854) 9 Exch. 34: see also the criticisms by Dr F. A. Mann in On Interest, Compound Interest and Damages (1985) 101 LQR 30, 34-35 and by Staughton LJ in President of India v. Lips Maritime Corporation [1985] 2 Lloyd’s Rep. 180, 185. Since Lord Brandon described the first rule in Hadley v. Baxendale as dealing with “general damages”, the difficulty is, if anything, greater. The two limbs of Hadley v. Baxendale are the practical expression of a single principle (inspired by the civil law) that parties should only be liable for damages which were when they contracted within their contemplation in the event of a breach. The precise line between the two limbs is itself hazy – especially in the modern legal environment where it is axiomatic and integral to contractual construction that it occurs not in a vacuum, but in the light of all surrounding circumstances within the parties’ knowledge. When seeking to distinguish the two limbs for present purposes, Lord Brandon quoted Lord Denning’s citation in the Trans Trust case, at p 306, of a passage from Bullen & Leake (3rd ed., at p.51) stating that the ground on which the London, Chatham and Dover case rested was “that interest is generally presumed not to be within the contemplation of the parties” (the important word “not” is omitted from the quotation at p.124H in the Appeal Cases report of the La Pintada case). But Lord Denning’s statement as to the general position does not exclude the existence of transactions, the very terms and nature of which makes it patent without more that loss of interest is likely to result from breach (i.e. falling within the first rather than the second limb of Hadley v. Baxendale). Further, when the Court of Appeal in Wadsworth v. Lydall [1981] 1 WLR 598 distinguished the London, Chatham and Dover case on the ground that it concerned general rather than special damages, I think it clear that they meant by special damages any damages provable under either limb of Hadley v. Baxendale: cf p. 603F-G. Indeed, the award of interest in Wadsworth v. Lydall itself was based as much on what was self-evident from the nature of the particular transaction as on any special communication: see per Brightman LJ at p.602E-F and Ormerd LJ at p.605 D-F.
It is, nevertheless, still fair to assume that loss of interest is not within the parties’ contemplation under many everyday contracts. It is in this context material that a contracting party has the opportunity to stipulate for, or reserve the right to claim, interest in the event of breach. The distinction emphasised by the House in Koufos v. C. Czarnikow Ltd. [1969] 1 AC 350 between, on the one hand, what is to be taken as within contracting parties’ reasonable contemplation and, on the other hand, what may be said to be reasonably foreseeable for the purpose of a claim for purely tortious damages remains good. So, to take some examples within the first limb: a householder who pays a builder’s or shop’s account late or very late should not (in the absence of contractual agreement or special circumstances) be taken to have within his or her contemplation for the purposes of Hadley v. Baxendale damage in the form of interest (or a fortiori compound interest); in contrast, a loan contract made specifically to enable an individual to refinance pre-existing loans or complete a property purchase could appear of its nature very likely, if broken, to give rise to the individual incurring damage by way of interest. Again, in the business to business sphere, while the business context may make it easier to show that loss by way of interest was within the parties’ reasonable contemplation, this cannot follow automatically. The Late Payment of Commercial Debts (Interest) Act 1998 (to which I refer later in this opinion) cannot be relegated to the status of a measure providing for simple interest either as a convenient and easier alternative to damages or in situations where no interest loss at all has been suffered. The present case should not therefore be seen as a charter for claims, still less for claims on a compound basis, in respect of interest losses following a breach of contract, where there is no contractual stipulation for its recovery, simply because it can be said that the situation was one where loss of interest might foreseeably, and did in fact, follow on breach. Neither general principle nor the cautious approach of Parliament and the Law Commission (to which I refer further below) would justify this. Before loss by way of interest is recoverable as damages, the higher threshold of reasonable contemplation must be crossed. Whether this has occurred depends on the particular case. But it is not appropriate to draw a line between the two limbs of Hadley v. Baxendale in the manner suggested in the La Pintada and Lips cases. Loss of interest is recoverable as damages for breach of contract, if it was within the reasonable contemplation of the parties, in the sense explained in Koufos v. C. Czarnikow Ltd., under either limb when the contract was made and is specifically pleaded and proved on that basis.
The rule in the London, Chatham and Dover case being thus confined, no reason appears why claims for loss of interest in tort, should be subject to special rules. In tort, there is generally no possibility of stipulating for the recovery of interest and the test of reasonable foresight, as opposed to contractual contemplation, operates as a significantly less strict pre-condition to recovery. The possibility of recovering such loss in tort has been recognised without reference to the London, Chatham and Dover case in Brandeis Goldschmidt & Co Ltd v. Western Transport Ltd [1981] QB 864, 873 (Brandon LJ), Swingcastle Ltd. v. Alastair Gibson [1991] 2 AC 223 (where the defendant valuer was not in contractual relations with the claimant lender (cf p.227D-F), and was referred to accordingly by Lord Lowry at p.239C-D as the “tortfeasor”), Nigerian National Shipping Lines Ltd. v. Mutual Ltd. (The Windfall) [1998] 2 Ll.R. 664, (Rix J) and The Mortgage Corporation v. Halifax (SW) Limited [1999] 1 Ll.R Prof. Neg. 159 (HHJ Laurie). La Pintada was, on the other hand, referred to in I. M. Properties Plc v. Cape & Dalgleish [1999] QB 297 and Blue Circle Industries Plc v. Ministry of Defence [1999] Ch 289, but in each case the Court of Appeal was concerned with claims to interest at conventional rates under s. 35A of the Supreme Court Act 1981 on moneys which had been recovered in mitigation of the claimants’ loss prior to action brought. In the former case, the Court concluded, correctly in my view, that the similar award made in the Westdeutsche case had been made per incuriam. In both cases, the Court acknowledged the possibility that the claimants might have been able to plead and prove a claim for special damage consisting of loss of interest, but none had been.
In Westdeutsche Landesbank Girozentrale v. Islington London BC [1996] AC 669 the argument proceeded, not surprisingly, on the basis that there was no power at common law to award compound (or, indeed, apart from statute, simple) interest (cf per Lord Goff at p.684G-H, Lord Browne-Wilkinson at p.700H and 717E-H, Lord Slynn at p.718F-H (although referring to the common law “as presently formulated”), Lord Woolf at p.722C-F and 730H-731A and 731F and Lord Lloyd at p.737B-C). The common law recognises a claim for money had and received, but, in the absence of a proprietary claim (and none is advanced by Sempra in this case), the money received belongs to the recipient while he holds it. Any interest received thereon thus also becomes the recipient’s. The common law does not recognise a claim against him for the use had of money had and received. Professor Birks points out that Lord Mansfield made clear in Nightingale v. Bevisme (1770) 5 Burr. 2589 (citing Moses v. Macferlan (1760) 2 Burr. 1005) that “‘money received’ meant what it said: the words could not be extended to other things” (cf An Introduction to the Law of Restitution, p 113). The subsequent cases cited in paragraph 206 above underline the point. The situation differs where there is a proprietary claim. The fruits or offspring of my property in your hands are mine.
Once a proprietary claim was ruled out, the issue in Westdeutsche Landesbank Girozentrale v. Islington London BC [1996] AC 669 became whether compound interest was recoverable in equity. The bank had paid £2.5 million to the council under a swap agreement, later established to be ultra vires the council. “Interest” payments totalling £1,354,474 were made by the council to the bank in 1988-89. The bank then commenced proceedings to recover the balance of the £2.5 million which it had paid, plus compound interest. The Court of Appeal awarded compound interest on the balance from time to time outstanding from 18th June 1987. Until the hearing before the House of Lords it was assumed in the light of Sinclair v. Brougham [1914] AC 398 that the council was liable as a fiduciary, and the claim for interest was made in equity on this basis (under the exception recognised by Lord Brandon in La Pintada). But, in the House of Lords, the House decided to hear argument on the correctness of Sinclair v. Brougham, and in the event held that it was wrongly decided. The width of equity’s power to award compound interest came thus into focus, although only at the end of long argument on other matters and in circumstances where the council was unwilling to devote more resources to a further day’s submissions (cf pp.679C, 717G-H and 738F-G).
By a majority (Lord Goff and Lord Woolf dissenting) the House refused to award compound interest in equity. The majority felt that any amendment of the law was a matter for Parliament: cf per Lord Browne-Wilkinson at pp. 717G-718C, Lord Slynn at pp.718H-719A and Lord Lloyd at pp.738D-741G, especially at p740D-741A). I have noted above the Court of Appeal’s conclusion in the I. M. Properties case that the order made in the Westdeutsche case was per incuriam so far as it awarded simple interest on the balance outstanding from time to time but paid by the date when action was commenced. The Court of Appeal assumed, rightly in my view, that this order was made under s.35A of the Supreme Court Act 1981. There is no sign of any submission that equity enabled an award of simple interest on a sum recovered prior to action brought. All three of the majority in the Westdeutsche case concentrated on rejecting the minority’s argument that equity could award compound interest in aid of a personal common law claim for money had and received.
In 1996 Parliament enacted the Arbitration Act giving an arbitration tribunal express power, unless otherwise agreed by the parties, to “award simple or compound interest from such dates, at such rates and with such rests as it considers meets the justice of the case” (section 49(3)) In 1998 Parliament enacted the Late Payment of Commercial Debts (Interest) Act 1998, later amended by the Late Payment of Commercial Debts Regulations 2002 (SI 2002 No. 1674), providing for a right to simple interest on the unpaid price of goods or services as from any agreed date of payment, or otherwise as from 30 days after the supplier’s performance or notice to the purchaser of the amount of the debt or, where that amount is unascertained, the amount claimed as the debt.
Following the Westdeutsche decision, the Law Commission in its Seventh Programme of Law Reform (1999) Law Com 259. p. 11, recommended an examination of the courts’ power to award compound interest. This led to its consultation paper (No. 167) in 2002 and its “Report on Pre-Judgment Interest on Debts and Damages” (No. 287) of 23 February 2004. The Law Commission proceeded in the light of authority on the basis that at common law no interest was recoverable on a claim for money had and received (para. 2.42 of the consultation paper). It understood (para. 5.16 of the Report) that:
“… compound interest evokes deep-seated fears. Where people are too poor even to service a loan, interest can become ‘a slippery slope to a situation of hopeless debt’. Where interest is compound, interest increases in an exponential rather than a linear way, which can make the calculation appear frightening and unpredictable.”
To this, one might add that it is not very many decades ago that double digit inflation was known in this country, and experience in the Privy Council of appeals from the West Indies, where it is still prevalent, includes banking cases where claims have multiplied several times in size with compound interest.
To allay the fears it had identified, the Law Commission observed in para. 5.17 of the Report that compound interest was already paid in common situations and that
“Following our recommendations, interest awards will remain discretionary. It will always be open to a court not to award any interest, or only to award it at a low rate”.
In para. 5.27-5.28 it addressed three reasons put to it for preferring simple to compound interest (viz to protect poor consumers, to discourage claimants from deliberately delaying claims and to avoid the cost of calculating compound interest), by saying (para. 5.28) that
“In most cases, however, the main way of protecting poor consumers is not to award interest at all (or only at a very low rate). The main way to discourage delay is for courts to exercise their existing discretion to award interest for only part of the period from cause of action to judgment or payment. The essential reason for preferring simple to compound interest lies in the cost of calculation. It therefore follows that there should be a presumption in favour of compound interest where the difference between the two is significant, and in favour of simple interest where the difference is insignificant.”
In the upshot the Law Commission, after consulting the judiciary, recommended that the Civil Procedure Rule Committee should have power to give guidance on when compound interest should be awarded a and that the rules should distinguish between awards or settlements of less than £15,000 (where there should be a rebuttable presumption that interest would be simple) and more than £15,000 (the reverse), and that the rules should exclude compound interest on any debts or damages outstanding for less than a year, unless the claimant could show exceptional contrary reasons. The Law Commission’s “Annual Report 2006-7” (Law Com No 306) printed by order of the House of Commons dated 13 June 2007, para. 3.54 records that “after three years we have not yet heard whether our recommendations are accepted”.
Sempra’s damages claim
Against this background, I turn to Sempra’s claim for damages caused by the breach of Community law consisting in the enactment and/or enforcement of the relevant ACT legislation. It is common ground that Sempra has in this respect a claim for, or analogous to a claim for, breach of statutory duty, in other words a tortious claim. The offending legislation required Sempra to “advance” to the Inland Revenue money on account of corporation tax, which would in due course be credited and offset against actual mainstream corporation tax. Payment was accelerated (or levied “prematurely” as the European Court put it – cf paragraphs 87 and 88), and the Inland Revenue thus acquired the use of the money for a period before mainstream corporation tax would otherwise have been paid. The loss of use of the money over a period as a result of the premature levy of the tax was, the European Court said, not an ancillary aspect but “the very objective” of the claim (paragraph 87). That such loss would be caused was plainly foreseeable and not at all remote. In these circumstances, nothing in La Pintada precludes a tortious claim for damages consisting of the loss of interest on the ACT paid during the periods until such ACT could be and was set off against mainstream corporation tax. The damages should in principle be such as would compensate Sempra fully for its foreseeable loss in respect of the period up to set-off. I add however that, if the unlawful legislation had required an outright payment not capable of recovery by set-off, this would not affect the strength of any claim which Sempra might plead and prove in domestic law for damages for loss of interest. It would merely mean that Sempra had a claim for damages composed of both the lost principal and the lost interest. The position would not be significantly different from that of a company which in the present ACT context never incurred mainstream corporation tax enabling it to achieve a set-off of ACT paid. It too could in domestic law plead and prove first the loss of the principal and second any interest loss.
The judge had before him extensive evidence about Sempra’s financial position at the relevant times, which showed that it was in a net borrowing position. He was evidently satisfied that Sempra had incurred properly recoverable loss of interest on a compound basis. On one view he should or might have sought to assess Sempra’s actual loss by detailed calculation. He decided instead that “full compensation” would be achieved by taking a conventional rate and by compounding that. There has been no challenge in this connection to his decision to take a conventional rate. As the Court of Appeal noted, a conventional rate will only give rise to full compensation in conjunction with compounding at the periodic intervals used in arriving at the rate. The commercial and indeed moral case for compounding was recognised on both sides of the decision in the Westdeutsche case [1996] AC 669: see per Lord Goff at p.691E-F, Lord Browne-Wilkinson at pa.717D and Lord Woolf at p.720B-C. The conclusion of the courts below in the present case that there should be compounding for the period until set off of the ACT is not open to challenge.
Park J drew a line at the point when set off occurred. After that point, he said that interest was only recoverable on a simple interest basis under s.35A of the 1981 Act. He said:
“46 ….. the claim for interest attributable to the post-utilisation period is different. It is truly ancillary: it is a claim for interest on the primary loss, and it is a claim for interest over the period between the time when the primary loss accrued and the time when judgment is given for the primary loss to be paid to Sempra by way of restitution or compensation. It may seem anomalous that Sempra’s recovery for the period from payment of the ACT until utilisation is in an amount computed by reference to compound interest, but its recovery for the period from utilisation until judgment is in an amount computed by reference to simple interest. However, the anomaly lies in the wording of s.35A of the 1981 Act. That section is the source of the claim for interest for the post-utilisation period, and it plainly restricts the interest to simple interest.”
There has been no appeal against this conclusion, and we did not hear argument on its correctness. I shall not therefore express any view about that, either way. It does mean that the longer the period before set-off, the longer the period during which compound interest is recoverable by way of damages. If no set-off had been possible, the period would have continued to judgment. But equally there is a point when, as in the case of President of India v. Lips, damages are being claimed for non-payment of damages.
Sempra’s restitutionary claim
I turn to Sempra’s alternative restitutionary claim in respect of the Revenue’s unjust enrichment. Since Sempra’s damages claim for compound interest succeeds, there is no European compulsion that Sempra should have any restitutionary claim to interest, either compound or even simple (cf paragraphs 199 and 200 above). But Sempra advances the two domestic law heads for such a claim, the second offering a limitation advantage, as identified in paragraph 192 above. The first relies on Woolwich Equitable Building Society v. Inland Revenue Commissioners [1993] AC 70, where the Revenue, after action brought, repaid tax which had been levied under ultra vires regulations. An award of simple interest was made under s. 35A in respect of the period prior to repayment. No consideration was given to compounding. The second relies on the House’s decisions in Kleinwort Benson Ltd. v. Lincoln C.C. [1999] 2 AC 349 and Deutsche Morgan Grenfell Group Plc v. Inland Revenue Commissioners [2007] 1 AC 558 on the basis that Sempra made its ACT payments under a mistake of law. Mr Glick submitted that there could not under this head be any European requirement to award compound interest, but, since I consider that there is no such requirement in any context, the argument becomes irrelevant. There is no reason why this head of recovery should not be available in domestic law, but the question is whether it can yield interest, either simple or, as Sempra submits, compound.
In respect of each head, Sempra’s primary case, as developed on the resumed hearing, is that the Revenue should pay a reasonable price for the use of the money which it had. On that basis, Sempra continues to support the judge’s and the Court of Appeal’s conventional, market-based borrower’s rate, which was agreed between the parties in the different context of a claim for damages or for “restitution” in respect of Sempra’s loss of use of the money. Sempra seeks to distinguish a claim on this basis from a claim to “disgorgement”, which it accepts would involve investigation into what benefit the Revenue (or Treasury) actually had from its use of the money. In support of its preferred former basis of claim, Sempra referred to cases such as Whitwham v. Westminster Brymbo Coal and Coke Company [1896] 2 CH 538, Watson Laidlaw & Co. v. Pott Cassells & Williamson (1914) 31 RPC 104, 119-120 per Lord Shaw, Inverugie Investments Ltd. v. Hackett [1995] 1 WLR 713 and Experience Hendrix LLC v. PPX Enterprises Inc [2003] EWCA Civ 323; [2003] 1 All ER (Comm) 830. These are all cases recognising the right to recover a reasonable price for the unauthorised use of various forms of property, irrespective of whether or not the claimant had lost thereby. These are all cases of what I will for present purposes (without entering into analytical controversy) identify as “restitutionary damages” in respect of a wrong. Attorney-General v. Blake [2001] 1 AC 268, where, exceptionally, a claim succeeded for a full account of the wrongdoer’s profits, is also a case of restitutionary relief (at a still more radical level) in respect of a wrong. In Experience Hendrix in a parenthesis at para. 26, I raised the possibility that recovery of a reasonable price might even be possible, where a wrongdoer had failed, perhaps simply due to his own incompetence, to make any profit. But not all commentators would agree with this, and I made clear that my parenthesis depended on the wrong-based nature of the claim.
In my view (and in agreement with my noble and learned friend Lord Scott of Foscote), if any claim to restitution is to be recognised in relation to the use of money had and received, at common law or in equity, it must refer to any actual benefit obtained by the recipient, here the Revenue. The critical point is that Sempra’s restitutionary claims – based on the Revenue’s demand or on Sempra’s own mistake – are not for damages or in respect of any wrong. They are for simple restitution of the unjust enrichment achieved by the Revenue. None of the cases cited in the previous paragraph has any present relevance. It is indeed essential to the limitation advantages at which Sempra aims under section 32(2)(c) of the Limitation Act 1980 that its mistaken payment claim is just that – a claim for “relief from the consequences of a mistake” – and is not a claim for “restitutionary” damages or restitutionary relief consequent on a wrong. The distinction is important. It was a corner stone of the late Professor Birks QC’s last work, Unjust Enrichment (2nd ed.) (2005). He observed at p. 11, “The most important feature of mistaken payments is the absence of contract and wrong”, and it is necessary to “isolate” and draw “a careful line” around cases of unjust enrichment which are “not manifestations of consent and are not wrongs”. Professor Burrows in The Law of Restitution (2nd Ed.) (2002) draws the same distinction. He deals in chapter 1 with the “unjust enrichment principle and its four essential elements” and, quite separately, in chapter 14 with “restitution for wrongs” where he discusses all of the cases identified in the previous paragraph of this opinion which had been decided by 2002. His introduction to chapter 14, at p 455, points out that “the distinction between restitution for wrongs and unjust enrichment by subtraction [i.e. enrichment “at the expense of the claimant”] reflects different moral ideas. Both Birks and Burrows stress that it is fundamental to restitution for unjust enrichment that any recovery must relate to the actual benefit obtained. However restitutionary damages are rationalised, their award derives from the wrong upon which they are based, and this justifies a measure of recovery which is objective or assessed by reference to a “hypothetical bargain”, as Burrows points out at pp. 468 to 470 and 477 in his chapter 14. In contrast, restitution on the basis of unjust enrichment looks, carefully and advisedly, at the recipient’s actual benefit.
This was the point that Professor Birks introduced in Unjust Enrichment (2nd ed.) p.53, by pointing out that there was no room for argument about the value of the money received, but a question did arise about the value of money over time, which would “have to be handled very carefully when next it is revisited”. He went on to say that the use of money is, in itself, “a non-money benefit and, whether the issue is enrichment or disenrichment, it has to pass the tests applied to other non-money benefits”, and to identify the two basic situations in which “exceptionally” the law will recognise such a benefit as having a value: see p. 55. In the present context, that means showing that the recipient received an incontrovertible benefit from the use of the money, for example by earning interest on it or saving interest on borrowings that would otherwise have been made: see pp. 55 and 59-62. These passages show that, far from operating as a control on or qualification of some objective or hypothetical measure of recovery, the principle of “subjective devaluation” makes actual or “incontrovertible” benefit the very test of and pre-condition to recovery: see also Birks, An Introduction to the Law of Restitution (2nd Ed.) pp. 108-114, especially 114, and Burrows in The Law of Restitution (2nd Ed.) p. 18, et seq.
My noble and learned friends Lord Nicholls and Lord Hope advocate an alternative approach, according to which a prima facie right would exist to recover a conventional or “objective” measure of loss, which could then, to some uncertain extent, be qualified by the application of another principle identified in the case of Lord Nicholls as subjective devaluation. I do not regard such an analysis as correct in principle. And it seems to me illogical and potentially unfair in the form advanced by Lord Hope. Why should there be a legal (as opposed, perhaps, to an evidential) onus on the recipient to displace a conventional or objective measure? Why should the rigour of a conventional approach be mitigated, only partially, as I understand my noble and learned friend Lord Hope’s approach, by allowing the recipient (or “enrichee”) to refer to “the [borrowing] rates and other terms …. relevant to the circumstances of the enrichee”? Why should a recipient not simply say that he, she or it did not in fact use the money received at all, or borrow any less money as a result of having its use? We are not here concerned with a wrongdoer or with compensation, but with recoupment by an innocent (albeit, as it transpires, unjustly enriched) recipient. Why should such a person use the money received in any particular way? Why should he or she not put it in a non-interest bearing current account or even under their bed? As I understand my noble and learned friend Lord Nicholls’s approach, he would have sympathy with these points, but as giving rise to a possible qualification, in the interests of justice, on a prima facie objective measure of recovery, which may or may not be characterised as an aspect of a possible defence of change of position. As I have said, that seems to me at the least incorrectly to reverse the legal onus. The basic test of recovery in my view looks directly to and depends on actual benefit. Any change of position defence seems to me a separate matter, arising after any actual benefit has been ascertained, if, for example, the recipient then suggests that he has disbursed that benefit by expenditure which would not otherwise have been incurred. But, in a fully investigated context, Lord Nicholls’s approach should assimilate with Lord Scott’s and mine (viz, that actual benefit is what matters) in the end result. Lord Hope’s approach could on the other hand lead to a very different result.
Returning to the basic question whether the law can and should recognise a restitutionary claim in unjust enrichment relating to any actual interest benefit obtained by the Revenue, such a claim faces a long line of authority refusing any interest on any basis at common law on claims for money had and received. The further obstacle to any claim for compound interest is the majority decision of this House in the Westdeutsche case. In their opinions my noble and learned friends, Lord Nicholls of Birkenhead and Lord Hope of Craighead, take the view that the House can now revisit the common acceptation of the common law rule over nearly two hundred years of the law’s development, including by the most eminent counsel and judges in the Westdeutsche case. I find myself unable to agree. But, if the common law rule were or is now to be reversed, it would follow, as I have already indicated, that damages should be measured by reference to any actual benefit received by the recipient, not some conventional or objective benefit. I reinforce this by adding that, if a claimant in a claim for special damages can only recover his actual (pleaded and proved) loss of interest, no reason appears why a claimant should be entitled in a common law claim for restitution against an innocent recipient to recover anything other than the recipient’s actual benefit.
However, I for my part regard it as a step too far now to reverse the common law approach to restitution in respect of money had and received for two main reasons. First, the existing common law rule has been recognised and effectively endorsed by the courts over two centuries, by the 1934 Law Revision Committee, by the Law Commission in all its reports and, above all, by Parliament. In contrast to the position regarding interest on debts, where the London, Chatham and Dover case can be distinguished as dealing only with claims to general damages, it is clear that these authorities all proceeded on the basis that there could be no common law claim for the use, or for any actual benefit obtained from the use, of money had and received. Second, there are in my view policy reasons making it unwise to introduce an absolute right to compound interest in restitution, and especially so if this were, as it should be, contingent upon proof of actual benefit acquired by the recipient. Restitution of any interest benefit received by a recipient of money had and received is not concerned with loss which a claimant himself actually suffers and knows and can prove that he has suffered. Yet its ascertainment would require investigation and evidence – often likely to be detailed and expensive, as the present case shows – relating to what the recipient has done with the money had and received. There could then be arguments about change of position, in so far as the recipient had disbursed any interest. Pragmatically, it seems to me dubious policy to recognise an absolute right to restitution of unjust enrichment which would in every case entitle a claimant (and as a matter of professional competence often require his lawyers) to insist on full disclosure of whatever the defendant had done with the money in order to assess what benefit had been had thereby. I would therefore reject the invitation to revisit the common law rule.
I would, like my noble and learned friend Lord Walker of Gestingthorpe, prefer to address the present situation by accepting Mr Rabinowitz’s powerful invitation to the House to revisit the area of equity which only arose for consideration in unsatisfactory circumstances in the Westdeutsche case [1996] AC 669 and led there to a three to two division in the House. This would involve departing from the decision of the majority pursuant to the Practice Statement (Judicial Precedent) [1966] 1 WLR 1234, but it was an express purpose of the second question raised by the House with the parties leading to the resumed hearing of 16th May 2007 to consider whether this should be done. It is right to add that I have felt some unease about an invitation to a committee of five members of the House to reconsider a recent previous decision, where there was a three to two division of opinion. Further, the issue whether equity can assist requires more than simple reconsideration of the result in the Westdeutsche case. As already observed, the House there simply did not address the problem that the interest claimed related to the balance from time to time outstanding, and so, in considerable measure, to interest on principal repaid before action brought. The minority focused in their dissenting speeches on the power of equity to act in aid of the common law (see per Lord Goff at pp. 695E, 696 C-D and 698E) or in a manner ancillary to (or in conjunction with or in addition to) an order for restitution at common law (cf per Lord Woolf at pp. 719C, 721B, 722B-C (though with the word “usually”), 724G and 735D.
Mr Rabinowitz accepts that, in so far as the principal sums were repaid before action brought, there is no common law claim in aid of or ancillary to which equity can act. But he submits that that is not the end of the matter. Equity itself possesses remedies enabling monies paid under a mistake to be recovered, even though they may be differently described, for example as involving an order for an account. Court of Appeal cases recognising that equity could in this respect mirror the common law are Rogers v. Ingham (1876) 3 Ch. D. 351 and Harsant v. Blaine, Macdonald and Company (1887) 56 LJQB (NS) 511. In the former case, the claim failed because based on mistake of law. In the latter case, the only mistake was the agent’s in thinking that he was not liable to account for the particular monies received, and (simple) interest was awarded at 4% per annum from the date when the principal demanded payment.
Although in the Westdeutsche case, equity was being invoked to act in aid of a common law claim for restitution, I cannot think that Lord Goff and Lord Woolf would have declined to extend the equitable power to award compound interest to a situation like the present merely because the principal sum was recouped before action brought. It is true that such an extension involves recognising an independent equitable claim to recover interest. But the restitutionary impulse that the Revenue should relinquish any monetary benefit actually received is a strong incentive to extend equity’s reach to such cases. As the European Court of Justice stressed in paragraphs 87 to 89 of its judgment, the essence of the United Kingdom’s legislative scheme, and of the levying of ACT under it, was that the Revenue would receive payment of tax prematurely, to hold until it was recouped by set off against mainstream corporation tax liability. Sempra was thus, by making taxable profits but no thanks to the Revenue, able to recoup most of the principal sums by set off. By the same token, to limit recovery of interest to a situation in which Sempra was unable to recoup the principal sums of ACT paid and had to sue for them, would be to confine recovery to atypical circumstances.
The other obstacle faced by Sempra’s claim relates to the circumstances in which equity will award compound interest. The Harsant case cited above in fact falls within the category of claims against fiduciaries in relation to which Lord Brandon in La Pintada pointed out that the equitable jurisdiction to award interest, with compounding, was well established. The principles were set out by Lord Denning MR in Wallersteiner v. Moir (No 2) [1975] QB 373, 388B-G and by Lord Goff in the Westdeutsche case at pp 692D-H. In claims against fiduciaries, the court may in its discretion award interest on a simple or compound basis, as it concludes that the circumstances require. In other cases, as where granting specific performance or rescission of a bargain or taking an account, equity commonly awards simple interest only. But Lord Goff and Lord Woolf in the Westdeutsche [1996] AC 669 case considered that the equitable jurisdiction to award compound interest extended to personal claims where there was no question of failure to account as a fiduciary: see e.g. per Lord Goff at pp. 693H-695E and Lord Woolf at pp 726H-730H. In my view, the House can and should now adopt this approach. The courts of equity developed the equitable jurisdiction to award interest. There is no sustainable reason in modern conditions for continuing to limit it artificially in a way which may prevent the court doing equity.
I would in these circumstances respond to Sempra’s invitation to revisit the Westdeutsche case, by adopting the minority approach in preference to that of the majority and also by determining that in appropriate circumstances equity can go further and provide relief in respect of any actual interest benefit received from any principal sum paid by mistake, even though such principal may be recouped before action brought. However, while the basic aim should be to restore any actual benefit received, I emphasise that I regard equity’s jurisdiction in these respects as discretionary, as, it is clear, did the minority in the Westdeutsche case. At p. 698G in that case Lord Goff would have approved Dillon LJ’s exercise of discretion in the Court of Appeal, and at pp. 722D and 735C-D Lord Woolf carefully spelled out the discretionary nature of the relief which he would have granted and its advantages. In my view, these advantages are considerable. Using their discretion, courts will be able to keep equitable claims seeking to investigate and recover any actual benefit obtained by the use of money had and received within sensible bounds, and also to avoid detailed arguments about change of position where these would be likely to give rise to disproportionate expense to resolve. The sensible exercise of such a discretion should go some way to meet concerns like those expressed to and recognised by the Law Commission in cases where the sums or periods involved are small. Courts should be able to discourage or refuse expensive demands for discovery by claimants hoping to investigate precisely what interest benefit a defendant may have made, in circumstances where that would be disproportionate. While the general basis of any award made should be to recoup any actual benefit, this does not entitle a claimant to insist either on full investigation or full disgorgement or to compound interest in every case. The court can take a robust and general approach.
Conclusion
In the present case, in view of the size of the sums in question, and the fact that they were recouped not as a result of anything done by the Revenue, but simply because Sempra happened to be able to set them off before action brought, I consider that Sempra should be able to recover from the Revenue an award of interest on a compound basis to reflect any actual benefit which the Court may find to have been made by the Revenue on such a basis through its receipt and retention of the ACT payments up to the time of their set off against mainstream corporation tax. In view of the manner in which the case proceeded below, I further consider that the question should be remitted to the Chancery Division, for the judge there to consider what actual award should be made against the Revenue to reflect, whether broadly or precisely, any actual benefit which the Revenue may be found to have received. In all other respects, I would dismiss this appeal.
Test Claimants in the Franked Investment Income Group Litigation v Inland Revenue
[2012] UKSC 19
LORD HOPE
Very substantial judgments have been prepared in this case by Lord Walker, Lord Reed and Lord Sumption, to each of which I pay tribute. I wish in this short introduction to do two things. First, I shall say a bit about the background, to assist the reader in understanding at the outset what the issues are and to provide a guide to the passages in those judgments where they are dealt with. Second, I shall indicate briefly what my opinion is on each of them. I will however have to say a bit more about the one issue on which the court is divided: the DMG remedy/section 320 issue: see para 11, below. As it raises a question of EU law and the division of opinion shows that the answer to it is not acte clair, it is plain that it will need to be the subject of a reference to the Court of Justice for a preliminary ruling under article 267 TFEU.
The proceedings
As Henderson J explained at the outset of his judgment [2008] EWHC 2893 (Ch), [2009] STC 254, para 1, the Franked Investment Income (“FII”) Group Litigation with which these proceedings are concerned was established by a group litigation order on 8 October 2003. The test claimants are all companies which belong to groups which have UK-resident parents and also have foreign subsidiaries, both in the European Union and elsewhere. In the broadest terms, the purpose of the litigation was to determine various questions of law arising from the tax treatment of dividends received by UK-resident companies from non-resident subsidiaries, as compared with the treatment of dividends paid and received within wholly UK-resident groups of companies. The provisions giving rise to these questions related to the system of advance corporation tax (“ACT”) and to the taxation of dividend income from non-resident sources under section 18 (Schedule D, Case V) of the Income and Corporation Taxes Act 1988 (“the ICTA”) (“the DV provisions”). The relevant provisions of the ICTA have since been amended, ACT was abolished for distributions made on or after 5 April 1999 and the DV provisions were repealed for dividend income received on or after 1 April 2009. But the problems created by their existence in the past have not gone away.
The test claimants’ case is that the differences between their tax treatment and that of wholly UK-resident groups of companies breached article 43 (freedom of establishment) and article 56 (free movement of capital) of the EC Treaty (now articles 49 and 63 of the Treaty on the Functioning of the European Union) and their predecessor articles, and that these breaches have caused them loss dating back, at least in some cases, to the accession of the UK to the European Economic Community signed at Brussels on 22 January 1972 and the introduction of ACT in April 1973. Their arguments are directed in part to issues of domestic law. But they are also directed to the extensive case law resulting from the application by the Court of Justice of the European Communities and, since the coming into force of the Lisbon Treaty, the Court of Justice of the European Union of principles of Community law to domestic tax systems, including an earlier reference in this case: Test Claimants in the FII Group Litigation v Inland Revenue Comrs (Case C-446/04) [2007] STC 326. They raise difficult issues, and very large amounts of money are at stake. Henderson J was told that the maximum amount of the claims advanced in the FII Group Litigation was of the order of £5 billion.
The issues with which Henderson J had to deal were grouped by him under four headings: see [2009] STC 254, para 7. These were (1) the lawfulness of the UK rules imposing corporation tax on dividends received by UK parent companies from subsidiaries resident in other EU member states and, in some contexts, from subsidiaries in third countries, (2) the lawfulness of UK rules charging ACT on the onward distribution by UK-resident companies of dividend income received from such subsidiaries, (3) the lawfulness of rules applicable to dividends payable out of distributable foreign profits which permitted an election to be made to treat such income as foreign income dividends (“FIDs”) and (4) a number of fundamental questions relating to remedies.
He held that it followed from the judgment of the ECJ under the earlier reference that the UK rules on corporation tax on overseas dividends were not compatible with Community law as regards dividends from subsidiaries resident in other member states, and that the UK legislative scheme as regards FIDs also breached Community law. A further reference was however required in relation to two of the issues relating to liability: paras 138, 197. As for the issues relating to remedies, it was common ground that two types of restitutionary remedies are available in domestic law: a claim for restitution of tax unlawfully demanded under the principle established in Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70 (“Woolwich”), and the claim for tax wrongly paid under a mistake which was recognised in Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs [2006] UKHL 49, [2007] 1 AC 558 (“DMG”).
Henderson J held that, under the principle laid down in Amministrazione delle Finanze dello Stato v SpA San Giorgio (Case 199/82) [1983] ECR 3595 (“San Giorgio”), EU law required there to be an effective remedy for monies paid in respect of the tax that was unlawfully charged. The test claims were properly to be classified in English law as claims in restitution based on a mistake of law. The Woolwich cause of action (which is now time-barred), for which mistake was not a necessary ingredient, was likely to play a subsidiary role in such cases: para 260. It was not open to the Revenue to rely on section 320 of the Finance Act 2004 (“Section 320 FA 2004”) or section 107 of the Finance Act 2007 (“Section 107 FA 2007”) to exclude DMG mistake claims, as these provisions purported to curtail the extended limitation period under section 32(1)(c) of the Limitation Act 1980 without notice and without providing any transitional arrangements to protect the right under Community law. But the test claimants had failed to establish any sufficiently serious breach to entitle them to damages.
The case then proceeded to the Court of Appeal (Arden, Stanley Burnton and Etherton LJJ): [2010] EWCA Civ 103, [2010] STC 1251. The various issues were made the subject of an agreed list which the court amended and to which it gave numbers. They were identified in an index at the beginning of the judgment, to which reference may be made. Issues 1 to 10 related to liability. Issues 11 to 23 were concerned with remedy. The Court of Appeal was divided as to the meaning of para 54 of the judgment of the ECJ with respect to one of the test claimants’ submissions on liability, so it held that a reference should be made on that issue. On all but one of the other issues relating to liability it agreed with the judge. On four issues relating to remedy the appeal by the Revenue was allowed. Differing from the judge, it held that the Woolwich restitution remedy was a sufficient remedy as EU law does not require that there must also be a remedy based on mistake (issue 12); that the Woolwich restitution remedy met the requirements of EU law and was not affected by sections 320 FA 2004 and 107 FA 2007 (issues 20 and 21); and that section 33(2A) of the Taxes Management Act 1970 (“TMA”) (issue 23), which excludes relief under that section where Case V corporation tax has been paid under a mistake, applied to an assessment based on a provision that infringed Community law as a conforming interpretation could be given to it. Issue 22, as to whether section 32(1)(c) of the Limitation Act 1980 applied to a Woolwich claim, was not argued before the judge. But it was argued before the Court of Appeal, which held that it could not be given that wider meaning.
Applications for permission to appeal to the Supreme Court were lodged by both parties. On 8 November 2010 the panel refused permission on the issue as to which the Court of Appeal decided that there should be a reference, and it remitted another issue relating to liability to the management judge to frame a reference on that point also. The time limit for making an application for permission on a number of other issues, including issue 22, was extended until the references had been determined by the ECJ and its rulings applied by the Court of Appeal. But permission to appeal was given on four issues relating to remedy: issues 12, 20, 21 and 23. Shortly before the hearing of the appeal permission was given to the claimants for issue 22 to be argued also.
The issues
The parties are agreed that the issues in the appeal are best expressed as follows:
“(1) Could Parliament lawfully curtail without notice the extended limitation period under section 32(1)(c) of the Limitation Act 1980 for the mistake cause of action (section 320 FA 2004) and cancel claims made using that cause of action for the extended period (section 107 FA 2007)? In particular:
(a) Would a Woolwich restitution remedy be a sufficient remedy for the repayment claims brought on the basis of EU law (Court of Appeal issue 12)?
(b) Whether or not a Woolwich restitution remedy would be a sufficient remedy, does EU law protect the claims which were made in mistake; and, specifically, did the curtailment without notice of the extended limitation period for mistake claims (section 320 FA 2004) and the cancellation of such claims in respect of the extended period (section 107 FA 2007) infringe the EU law principles of effectiveness, legal certainty, legitimate expectations and rule of law (Court of Appeal issues 20 and 21)?
(2) Are the restitution and damages remedies sought by the test claimants in respect of corporation tax paid under section 18 (Schedule D, Case V) of the ICTA 1988 excluded by virtue of the statutory provisions for recovery of overpaid tax in section 33 of the Taxes Management Act 1970 (Court of Appeal issue 23)?”
To that there must be added the following:
“(3) Does section 32(1)(c) of the Limitation Act 1980 apply to a claim for a Woolwich restitution remedy (Court of Appeal issue 22)?”
As Lord Walker explains in para 35 below, a further issue became apparent as the parties’ submissions on issues 12, 20 and 21 have developed which can be expressed as follows:
“(4) Does the Woolwich restitution remedy apply only to tax that is demanded by the Revenue, and not to tax such as ACT which is payable on a return; and, if so, what amounts to a demand?”
In the judgments that follow:
a. Issue (4), above, the question whether a Woolwich claim arises only where a demand has been made by the Revenue, is dealt with by Lord Walker in paras 64-83 and by Lord Sumption in paras 171-174.
b. Issue (3), above (Court of Appeal issue 22), as to whether section 32(1)(c) of the Limitation Act 1980 should be widely construed so as to give a Woolwich restitution remedy the benefit of the extended limitation period, is dealt with by Lord Walker in paras 42-63 and by Lord Sumption in paras 177-185.
c. Issue (2), above (Court of Appeal issue 23), as to whether section 33 of the TMA is incompatible with EU law because it excludes the test claimants’ right of action at common law, is dealt with by Lord Walker in paras 116-119 and by Lord Sumption in paras 204-205.
I agree, for all the reasons they give, that each of these three distinct issues should be answered in the negative. I would uphold the judgment of the Court of Appeal on issues (3) and (4) and, because it should not be read as excluding rights of action for the recovery of tax charged contrary to EU law, I would allow the appeal on issue (2) as to the meaning of section 33 of the TMA.
The DMG remedy/section 320 issue
The remaining issue (issue (1), above) is an issue of EU law. The background is provided by the ruling of the Grand Chamber that it is for the domestic legal systems of each member state to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, and that the national courts and tribunals before which claims are brought are obliged to ensure that individuals should have an effective legal remedy enabling them to obtain reimbursement of the tax unlawfully levied by a member state or withheld by it directly against that tax: Test Claimants in the FII Group Litigation v Inland Revenue Comrs (Case C-446/04) [2007] STC 404, paras 202-203.
It follows from the answers given to issues (3) and (4) that this issue must be approached on the basis that a Woolwich claim would have been available had it been brought in time. But it has been excluded by the expiry of the limitation period. The test claimants are left therefore with their DMG mistake claim. It has the benefit of the extended limitation period, but the Revenue say that it has been excluded by section 320 FA 2004 and section 107 FA 2007.
As Lord Walker explains in para 38, the question is whether EU law requires only that the member state must make available an adequate remedy which meets the principles of effectiveness and equivalence, or whether it requires every remedy recognised in domestic law to be available so that the taxpayer may obtain the benefit of any special advantages that this may offer on the question of limitation. The position in domestic law is not now in doubt. In DMG it was held that the taxpayer was entitled to take advantage of the remedy which was most advantageous to him. The fact that a Woolwich claim was not available because it was subject to a shorter limitation period did not prevent him from pursuing his mistake claim if his interests were best suited by doing so.
This issue can be broken down into three questions: (1) would Woolwich on its own provide a remedy for the test claimants’ San Giorgio claims which satisfies the requirements of the EU principles of effectiveness and equivalence? (2) were those principles, and the principle which protects legitimate expectations, infringed by section 320 FA 2004, which curtailed without notice the extended limitation period for mistake claims? (3) were these principles infringed by the retrospective cancellation of such claims by section 107 FA 2007 in respect of the extended period?
Lord Walker and Lord Sumption are agreed that section 107 FA 2007 was contrary to EU law, although they do not reach that conclusion by the same route. This is because they disagree on the primary issue as to whether Woolwich on its own was sufficient to meet the requirements of effectiveness and equivalence. Having reached the view that it was not, Lord Walker holds that section 320 FA 2004 was not compatible with EU law as it infringed those principles and maybe that it infringed the principle of legitimate expectations too: para 114-115. Lord Sumption disagrees. He holds that the Woolwich remedy on its own with a normal limitation period was an effective way of asserting the test claimants’ EU right, that there was no obligation on the UK to maintain a concurrent right and that, for this reason and because the test claimants could not have had a legitimate expectation that they would have the benefit of the extended limitation period, section 320 FA 2004 was lawful: paras 198-202. But, because the circumstances had changed and they had acquired a legitimate expectation by 2006, it was contrary to that principle for that expectation to be defeated by section 107 FA 2007. Like Lord Walker (see para 115), I agree with Lord Sumption’s reasoning in para 203 as to section 107 FA 2007.
On the primary issue however, like Lord Reed, I agree with Lord Walker. I would take as my starting point the fact that in domestic law two types of restitutionary remedies are available and that the taxpayer is entitled to take advantage of the remedy that is most advantageous to him: a claim for restitution of tax unlawfully demanded under the principle established in Woolwich, and the claim for tax paid under a mistake of law which was recognised in DMG. It is, of course, true that DMG had not yet reached the House of Lords when section 320 FA 2004 was enacted. But the common law rule that money which had been paid under a mistake of law was not recoverable had already been rejected. It was rejected in Scotland in Morgan Guaranty Trust Co of New York v Lothian Regional Council 1995 SC 151, for reasons that were special to Scots law, and in South Africa in Willis Faber Enthoven (Pty) Ltd v Receiver of Revenue 1992 (4) SA 202. But it had also been rejected by the common law in Canada: see the dissenting opinion of Dickson J, with which Laskin CJ agreed, in Hydro Electric Commission of Township of Nepean v Ontario Hydro [1982] 1 SCR 347, 357-370. Dickson J’s opinion was adopted by La Forest J, with whom Lamer, Wilson and L’Heureux-Dubé agreed on this point, in Air Canada v British Columbia [1989] SCR 1161. The same result was reached in Australia in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. Then in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 the House of Lords held that the rule could no longer be maintained, and that it should be recognised that there was a general right to recover money paid under a mistake, whether of fact or law.
It was contended for the Inland Revenue Commissioners in DMG that the general right of recovery did not apply in the case of payments made under a mistake of law to the revenue. But this topic had already been the subject of comment by one of the most distinguished and influential scholars on the law of restitution, the late Professor Peter Birks. He declared that, unless displaced by statute, causes of action good against private citizens are no less good against public bodies: see his essay (in the volume Essays on Restitution (1990), edited by Professor P D Finn) entitled “Restitution from the Executive: a Tercentenary Footnote to the Bill of Rights”, at p 174. He also made the point that, if in Woolwich the building society had made a mistake of fact, it would undoubtedly have entitled the society to restitution of the money it paid to the revenue in consequence of its mistake, just as it plainly would have been had the transaction been with a private citizen. The decision of Park J at first instance in DMG [2003] 4 All ER 645, [2003] STC 1017, in which he upheld the taxpayer’s claim for repayment of tax wrongly paid under a mistake of law with an extended limitation period, should be seen against this background.
As Henderson J observed in para 406 of his judgment, it was not possible to predict with any confidence what the outcome would be of the appeals in DMG that were to follow. But I think that it would be going too far to say that Park J’s judgment was bound ultimately to be set aside. The fact that on 8 September 2003, less than two months after Park J’s judgment was delivered on 18 July 2003, the Paymaster General announced the introduction of what was to become section 320 FA 2004, and said that it was to affect proceedings issued on or after that date, suggests that the revenue had at least some expectation that it would not be successful in achieving that result. Like Lord Walker (see para 108), I think that the suggestion that the Court of Appeal’s decision was just a “bump in the road” understates the strength of the arguments in support of its appeal. But I cannot agree with Lord Sumption (see paras 200-201) that it was unrealistic for there to have been a reasonable expectation by that date that the right of recovery on the ground of mistake with an extended limitation period would be upheld. My own view lies between these two extremes.
I share Lord Walker’s view that it would have been helpful to have had the view of the judge on this issue: para 112. But I also think that in para 243 Lord Reed has identified the right way to look at it, which does not require anything more than we already know. One must ask oneself what the test claimants were entitled to expect when they made their claims based on mistake. There was no certainty at that time when section 320 FA 2004 was enacted that their claims based on mistake would succeed. But those claims were undoubtedly arguable, as the subsequent ruling by the House of Lords in DMG [2007] 1 AC 558 made clear. They were entitled to expect that the question whether their claims based on mistake were well founded would be decided by the courts, as there was a real issue to be tried. They were also entitled to expect, according to the principle of legal certainty, that this entitlement would not be removed from them by the state by the introduction without notice of a limitation period that was not fixed in advance: see ACF Chemiefarma v Commission of the European Communities (Case 41/69) [1970] ECR 661, para 19; Marks & Spencer plc v Customs and Excise Comrs (Case C-62/00) [2003] QB 866, para 39.
The crucial question, however, is whether the retrospective application of that limitation period to claims based on mistake was in conformity with the principles of equivalence and effectiveness, as explained by the Grand Chamber in its judgment in these proceedings: Case C-446/04 [2007] STC 404, para 203. I accept, of course, that the Woolwich remedy on its own was an effective way of vindicating the San Giorgio right. But what about the principle of equivalence which, as Lord Reed points out in para 218, is a complementary requirement? The Woolwich remedy was not the only remedy in domestic law, as it was held in DMG that a taxpayer who wrongly paid tax under a mistake of law is entitled to a restitutionary remedy against the revenue. The theory is that judicial decisions must be taken to declare the law that applies to the case with retrospective effect, whenever the events that gave rise to the claim occurred. So, in the events that have happened, the DMG remedy must be taken to have been always available. It is not just a mirror image of the remedy that is afforded under Woolwich. Both remedies lead to the same result. But they are different remedies founded upon different principles and they are subject to different limitation periods. There may be other differences, depending on the facts and circumstances of each case.
There is no obvious way of deciding which of these two remedies must be adopted if only one can be allowed. Is it to be held the claimant is under an obligation, if both are available, to select the remedy which best suits his opponent? This would be an odd result, as I said in DMG [2007] 1 AC 558, para 51. For the reasons which I gave in that paragraph, I think that domestic law must reject this idea because it has no basis in principle. In fairness, the claimant ought to be free to choose the remedy that best suits his case. The principle of equivalence requires that the rules regulating the right to recover taxes levied in breach of EU law must be no less favourable than those governing similar domestic actions. So it seems to me that it must follow, if the means of recovering of taxes levied contrary to EU law are to match those in domestic law, that both remedies should be available.
Conclusion
For these reasons, and those given more fully by Lord Reed, I agree with Lord Walker’s analysis. I would hold that Parliament could not lawfully curtail without notice the extended limitation period under section 32(1)(c) of the Limitation Act 1980 for the mistake cause of action by section 320 FA 2004. I agree with both Lord Walker and Lord Sumption that it could not cancel claims made using that cause of action for the extended period by section 107 FA 2007. The question whether there was a legitimate expectation of bringing an action of the kind that was excluded by that section does not raise any issue of EU law. So I do not think that there are grounds for seeking a reference on that point.
I recognise however that, as there is a division of opinion among us as to whether EU law requires that both remedies should be available to the test claimants so that they can choose the remedy that best suits their case for reimbursement, the answer to that question cannot be regarded as acte clair. I would therefore invite the parties to prepare in draft the question or questions on which they suggest a preliminary ruling should be sought from the CJEU, and a brief note of the submissions that each party would wish to be included in the reference. I would also invite their views as to whether this reference should be combined with the references that are to be made on the other issues, or whether it should be submitted separately.
LORD WALKER
Introduction
This appeal is a further stage, but by no means the last stage, in complex and protracted group litigation, designated as Test Claimants in the FII [franked investment income] group litigation. In this group litigation, and other parallel group litigation proceedings, numerous issues have been raised as to whether features of the UK corporation tax regime infringe EU law, and as to the remedies available to companies which claim to have been financially disadvantaged in various ways by such infringements. These proceedings have already resulted in two references to the Court of Justice.
Since the Court of Justice’s judgment on the first reference ((Case C-446/04) [2007] STC 326), all the issues as to infringement have been considered by Henderson J [2008] EWHC 2893 (Ch), [2009] STC 254 and by the Court of Appeal [2010] EWCA Civ 103, [2010] STC 1251. Some have been decided and are no longer in dispute. In particular, it is now common ground that corporation tax measures relating to advance corporation tax (“ACT”) and foreign income dividends (“FIDs”) infringed former article 43 (freedom of establishment) and former article 56 (free movement of capital) of the EC Treaty, now articles 49 and 63 of the Treaty on the Functioning of the European Union. Other points have been made the subject of a second reference to the Court of Justice. On yet further points this court has extended time for an application for permission to appeal. One of these is the concurrent finding of the courts below that the infringements which have been established did not amount to grave and manifest breaches of EU law so as to give rise to a claim for damages on the principles in Brasserie du Pecheur SA v Federal Republic of Germany (Joined Cases C-46/93 and C-48/93) [1996] QB 404.
It is now clear that, apart from any possible claim for damages, the claims to be met by HM Revenue and Customs (“HMRC”, so as to include its predecessors) are restitutionary in nature. Some are straightforward claims for recovery of tax which the claimants paid when it was not due. Other claims are for less direct losses which the claimants say they sustained in consequence of the non-compliance of the corporation tax system with EU law. In relation to restitutionary relief for both the direct and the indirect losses there are important differences between the parties as to the characterisation of the remedies available to the claimants as a matter of English law. There are also important differences as to how far EU law requires the full range of domestic remedies to be made available for the recovery of unduly paid tax, despite parliamentary intervention (in the form of section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007) to curtail those remedies drastically and with retroactive effect. Those two provisions (“the statutory cut-off provisions”) are challenged as infringing EU law.
That is a brief sketchy overview of the significance of this appeal in the context of the larger campaign of the FII group litigation. Except in relation to the statutory cut-off provisions the Supreme Court does not on this appeal have to revisit any issue as to infringement of EU law. But it is appropriate to give a brief explanation of the ACT system, now abolished, that gave rise to the substantive infringements. A much fuller explanation can be found in the first instance judgment of Henderson J [2009] STC 254, paras 12 to 28. This draws on the first order for reference to the Court of Justice made by Park J on 13 October 1994. Since his retirement Sir Andrew Park has himself given an objective account of the progress of several of the associated sets of group litigation in “A Judge’s Tale: Corporation Tax and Community Law” [2006] BTR 322.
The ACT system
Corporation tax was introduced in the UK in 1965. At first the system was a “classical” system, with full double taxation of company profits and non-corporate shareholders’ dividends. In 1973 the system changed to one of “partial imputation”. When a UK-resident company paid a dividend it was required (by way of self-assessment) to pay an amount of ACT equal to the mainstream corporation tax (“MCT”) payable on the part of its profits distributed as dividend. A non-corporate shareholder became entitled to a tax credit equal to the ACT paid in respect of his dividend. A UK-resident corporate shareholder receiving a dividend from another UK-resident company received it as “franked investment income” (“FII”), and if it both received and paid dividends, ACT was payable only on the excess of its outgoing “franked payments” over its FII.
The position was different if a UK-resident company received a dividend from a non-resident company in which it was a shareholder. That was so whether or not the two companies were part of a group, but this group litigation, and the parallel ACT group litigation, have both been concerned with groups of companies. Most of the test claimants in this litigation are members of the British American Tobacco (“BAT”) group. In para 2 of his judgment Henderson J gave a concise explanation of this group litigation as compared with the ACT group litigation:
“Whereas the focus of the ACT Group Litigation was on the UK domestic legislation which prevented UK-resident subsidiaries of foreign parents from making group income elections, thereby obliging them to pay ACT when paying dividends to their foreign parents, the focus of the FII Group Litigation has been on UK-parented groups with foreign subsidiaries, and on the tax treatment of dividends coming into the UK from abroad. At the simplest level, therefore, the present litigation is concerned with factual situations which are the opposite of those which gave rise to the questions considered in Hoechst [Metallgesellschaft Ltd v Inland Revenue Comrs, (Joined Cases C-397/98 and C-410/98) [2001] Ch 620] and the ACT Group Litigation.”
Since 1973 the BAT group has gone through various structural changes (summarised in paras 1.8 to 1.21 of an agreed statement of facts set out in para 29 of the judge’s judgment) but it has always had as its ultimate holding company a UK-resident company whose shares are listed and whose thousands of shareholders expect to receive regular dividends. After 1973 the BAT group (in common with many large multinational groups) faced a difficulty in that when it received dividends from overseas subsidiaries it did not receive a tax credit that could be used to eliminate or reduce ACT payable in respect of its dividends to its shareholders. The overseas dividends were not FII. Although the UK-resident company was entitled to double taxation relief against MCT (in the form of a credit against foreign taxes paid by the subsidiary), it still had to pay ACT. If relatively little MCT was payable (because of double taxation relief) the ACT became surplus and of little or no utility to the holding company. A UK-resident company with overseas subsidiaries (whether resident within or outside the EU) was therefore at a disadvantage, and articles 43 and 56 of the Treaty were infringed.
The other test claimants are members of the Aegis group, another multinational group whose holding company is based in the UK. These claimants have been included because they are (and claimants in the BAT group are not) affected by section 320 of the Finance Act 2004.
The ACT regime was in force from 1973 to 1999. Its disadvantages for multinational groups were to some extent mitigated by provisions as to foreign income dividends (FIDs) which were in force from 1994 to 1999. A UK-resident company receiving dividends from non-resident companies could elect that dividends paid to its shareholders should be treated as FIDs. The effect was that ACT was still payable, but would in some circumstances be repaid after an interval, normally of a duration of between eight and a half months and seventeen and a half months. There is a fuller explanation of the law in paras 23 to 25 of the judge’s judgment, and of the facts as to FID “enhancements” in paras 277 to 302.
The principal statutory provision giving a tax credit on qualifying distributions between UK-resident companies was section 231 of the Income and Corporation Taxes Act 1988 (“TA 1988”). Issue 6 before the Court of Appeal was whether section 231 could be interpreted, under the Marleasing principle (Marleasing SA v La Comercial Internacional de Alimentación SA (Case C-106/89) [1990] ECR I-4135) so as to be compatible with EU law. The Court of Appeal held that it could be interpreted in that way. That is however an issue on which this court has deferred a decision on permitting a further appeal. The uncertainty as to section 231 is a further complication in clarifying the issues that are before the court on this appeal.
The issues
The Supreme Court gave permission to appeal on four of the 23 issues identified by the Court of Appeal (and set out in the index to its judgment, [2010] STC 1251). This permission was later extended to cover a fifth issue, numbered 22 in the Court of Appeal’s judgment, that is the correct construction and scope of section 32(1)(c) of the Limitation Act 1980. The other four issues covered by the formal order granting permission to appeal are wholly or largely questions of EU law, and the impact of EU law on domestic rights and remedies: that is (issue 12) remedies in English law; (issues 20 and 21) the compatibility with EU law of the statutory cut-off provisions; and (issue 23) whether section 33 of the Taxes Management Act 1970 (as amended) provides an exclusive code for recovery of tax mistakenly paid under an assessment, and the impact on that section of EU law.
However, as the parties’ written and oral submissions have developed it has become apparent that there is another wholly domestic issue of central importance to the appeal. The Court of Appeal differed from Henderson J as to whether the principle in Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70 (“Woolwich”) applies only to tax that is demanded by revenue authorities (and if so, what amounts to a demand).
For the appellants Mr Aaronson QC took the lead in making submissions on issues of EU law, followed by Mr Rabinowitz QC on issues of English law. This sequence of argument may have been unavoidable, but it produced the result that the court heard submissions about the attitude of EU law towards national procedures and remedies-which is an important part of this appeal-before hearing submissions about the English remedies themselves. It is more helpful to start with the issues of English law, and then assess the impact that EU law has on them. So this judgment proceeds to consider (i) the scope of section 32(1)(c) of the Limitation Act 1980 and (ii) the scope of the decision in Woolwich, before addressing the effect of EU law.
It may not be immediately apparent why these two domestic issues have assumed such significance, so a brief explanation is called for. The reason is certainly not the disinterested and scholarly interest of the parties, or either of them, in the development and clarification of English private law. That is apparent from another of the group litigation proceedings, NEC Semi-Conductors Ltd and Other Test Claimants v Inland Revenue Comrs [2006] EWCA Civ 25, [2006] STC 606 (“NEC”), in which (at paras 140 to 147) the claimant companies and HMRC (through counsel, most of whom have appeared on this appeal) made submissions on the Woolwich issue to the contrary effect, in each case, to those they have made on this appeal. These tactical shifts have occurred because, naturally enough, each side wants to win, by any proper line of argument, because of the very large sums of money at stake.
The main issue of EU law to be decided can be put, in a very simplified (but not, it is to be hoped, tendentious) form, as follows. When in any member state tax has been paid which was not due because the national taxing measure infringed the Treaty, must the member state make available to its aggrieved taxpayer (i) an adequate remedy which meets the principles of effectiveness and equivalence; or (ii) every available national remedy, including any that offers the taxpayer special advantages as regards limitation of actions?
At first glance the Woolwich principle provides an adequate remedy, subject to a six-year limitation period unaffected by the statutory cut-off provisions. Similarly at first glance mistake of law, following the decision of the House of Lords in Deutsche Morgan Grenfell Group Plc v Inland Revenue Comrs [2007] 1 AC 558 (“DMG”), provides a specially advantageous basis of claim because of the possibility of an extended limitation period under section 32(1)(c) of the Limitation Act 1980, but subject to the statutory cut-off provisions (if and so far as valid under EU law). But if the test claimants have no Woolwich claim, because as a matter of law such a claim requires an unlawful demand, and there was no such demand, mistake of law would be promoted, as it were, to being the only remedy available under national law, and so to being more surely entitled to protection under EU law. So it is expedient for the test claimants in this appeal to reverse the stance taken by the test claimants in NEC and argue that the Woolwich principle does not extend to self-assessed taxes, for which there is no official demand.
The issue on section 32(1)(c) of the Limitation Act 1980 is part of an alternative line of argument by which the test claimants seek to promote the mistake of law claim and so ensure its protection under EU law. They submit that section 32(1)(c) should be widely construed, contrary to the authority of Phillips-Higgins v Harper [1954] 1 QB 411, a first-instance decision which has however stood and been followed for over half a century. They submit that section 32(1)(c) is applicable, regardless of the cause of action, wherever there is a causally relevant mistake. In the words of Mr Rabinowitz (day 2, page 80), “The mistake element does not have to be a necessary part of the cause of action, so long as the mistake is materially causal or causally material in producing the circumstances from which relief is sought.” So this is an alternative method by which the test claimants seek to saw off the apparent support of the Woolwich branch in order to rely on mistake of law alone.
It seems very doubtful, even if their argument on section 32(1)(c) is sound, whether the claimants’ aim would be achieved. In other, more mainstream parts of their argument they rely heavily on the principle (reasserted in this context by the House of Lords in DMG [2007] 1 AC 558) that English law permits litigants to choose, as between concurrent causes of action, the cause or causes of action most advantageous to their interests. The test claimants have done so. In the amended particulars of claim of the BAT group, paras 15 and 15A, they have clearly and distinctly relied on two separate causes of action in unjust enrichment, that is (para 15) payment of tax unduly levied and (para 15A) payment under a mistake. Section 32(1)(c) is relied on in relation to “mistake claims” only (paras 18, 18A and 18B). The position is the same on the Aegis group’s pleadings. The statutory cut-off provisions (the essential text of which is set out at paras 107 and 109 below) do contain (in section 320(6) and section 107(2)) wide language extending the scope of the sections to actions not expressed to be brought on the grounds of mistake. So the apparently self-inflicted injury which the test claimants invite would seem to require an amendment to the pleadings, and even then (if the section 32(1)(c) argument succeeds) the Woolwich claim would remain with a six-year limitation period, which is what it has always been assumed to have. Nevertheless, the section 32(1)(c) point is an important point of law that has been fully argued, and so it should be addressed.
Section 32(1)(c)
Section 32(1) of the Limitation Act 1980 provides:
“Subject to [provisions not now material], where in the case of any action for which a period of limitation is prescribed by this Act, either –
(a) the action is based upon the fraud of the defendant; or
(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or
(c) the action is for relief from the consequences of a mistake;
the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.
References in this subsection to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent.”
It replaces (with a minor amendment to section 32(1)(b)) provisions first enacted in section 26 of the Limitation Act 1939, in which section 26(c) was in the same terms as section 32(1)(c). The change in the law made in 1939 was recommended by the Law Review Committee (chaired by Lord Wright MR) in its Fifth Interim Report, (Statutes of Limitation) (1936) (Cmd 5334). Indeed the expression “relief from the consequences of a mistake” appears three times in para 23 of the report, dealing with this topic. The recommendation was that in such cases the equitable rule (that time should run only from when the mistake was, or could with reasonable diligence have been, discovered) should apply to claims which were formerly within the exclusive jurisdiction of common law courts (as opposed to being within equitable or concurrent jurisdiction).
The previous state of the law was established by the decision of Hamilton J (later Lord Sumner) in Baker v Courage & Co [1910] 1 KB 56. The facts were that the plaintiff was the former owner of a public house who had in 1896 been mistakenly overpaid by £1,000 on the sale of his leasehold public house to the defendants, who were brewers. The plaintiff then deposited £9,000 at interest with the defendants. In 1909 he wished to withdraw the last of the deposit (standing, as it happens, at £1,000) but the defendants, on reviewing the position, discovered their mistake and refused to return the money. When sued they pleaded set-off and made a counterclaim, both of which were opposed as statute-barred.
Hamilton J referred (at p 62) to the purely equitable claim made in Brooksbank v Smith (1836) 2 Y & C Ex 58, a decision of Alderson B sitting in the equity side of the Court of Exchequer. Hamilton J said that Brooksbank v Smith
“was a case to which the Statute of Limitations did not apply; and the rule which was there laid down was one which in my opinion cannot be transferred to cases like the present, to which the statute does directly apply. In dealing with the latter class of cases, Courts of Equity were just as much bound by the statute as were Courts of Common Law.”
In any event, he went on, the brewers had had the means of knowing the truth throughout, if they had chosen to look at the sale contract and examine their books of account. He also rejected a second contention that time did not start to run until notice of the mistake (that is, the overpayment of £1,000 in 1896) had been given to the plaintiff and a demand had been made.
It is common ground that section 26(c) of the Limitation Act 1939 was intended to reverse the first point of principle (though not, on the facts, the result) in Baker v Courage & Co. The issue is how much further the change in the law was meant to go. The leading case on that point is the decision of Pearson J in Phillips-Higgins v Harper [1954] 1 QB 411. It was fully argued, and the argument is fully reported. Professor Andrew Burrows has noted that there was an unsuccessful appeal on the facts by the defendant, briefly reported at p 420, but no cross-appeal on the limitation point. The decision of Pearson J has been followed by the Court of Appeal, apparently with little or no oral argument on the point, in Malkin v Birmingham City Council (unreported) 12 January 2000, a claim for breach of statutory duty. The judgment of the Court of Appeal in this case recorded [2010] STC 1251, para 242 that Mr Ewart (for HMRC) “very generously” did not submit that the Court of Appeal was bound by Malkin. In any event the Court of Appeal, after full argument, accepted Phillips-Higgins and Malkin as correct. It did so after considering the history and language of section 32(1)(c), and the reasoning in the judgment of Pearson J (a long passage from which is set out at para 240). But for the general importance of the point, it might be sufficient to say that the Court of Appeal was right, and for the right reasons.
Phillips-Higgins v Harper was an action by a woman solicitor who had been employed as an assistant by a sole practitioner, Mr Harper, between 1938 and 1950, when she became a salaried partner. Her employment was, on her case, at a basic salary supplemented by an annual sum to bring her total remuneration up to one-third of the net profits of Mr Harper’s practice. Mr Harper contended that (until 1948) the bargain was to supplement her remuneration to one-quarter of the net profits as determined by his accountant, and he pleaded the Limitation Act 1939. The judgment is reported verbatim only on this point, but it is recorded (at p 413) that Pearson J found: “(1) that the original fraction of the relevant profit figure to which the plaintiff was entitled was one-third, and that that fraction had been reduced to one-quarter by the defendant by private instructions to his accountant and that the plaintiff did not know and did not consent to the reduction; (2) that the plaintiff’s contention as to the relevant profit figure was correct; and (3) that there had been no intention on the part of the plaintiff to agree the accounts over the material period and that therefore they had not been agreed and settled.”
Mr Harper’s position was therefore deeply unattractive. But the plaintiff was not mistaken about the bargain; her mistake was in believing that Mr Harper and his accountant were giving proper effect to it. As the judge hinted at p 418, the plaintiff might possibly have done better to rely on section 26(b), since although at that time it required fraudulent concealment, that expression was interpreted fairly broadly.
For present purposes the crucial passage is earlier on p 418. It is part of the passage quoted by the Court of Appeal, but it bears repetition:
“What, then, is the meaning of provision (c)? The right of action is for relief from the consequences of a mistake. It seems to me that this wording is carefully chosen to indicate a class of actions where a mistake has been made which has had certain consequences and the plaintiff seeks to be relieved from those consequences. Familiar examples are, first, money paid in consequence of a mistake: in such a case the mistake is made, in consequence of the mistake the money is paid, and the action is to recover that money back. Secondly, there may be a contract entered into in consequence of a mistake, and the action is to obtain the rescission or, in some cases, the rectification of such a contract. Thirdly, there may be an account settled in consequence of mistakes; if the mistakes are sufficiently serious there can be a reopening of the account.”
All these are examples of relief which removes or mitigates the adverse consequences to the claimant of the mistake, while respecting the position of the defendant where justice so requires (for instance by the defence of change of position where money has been paid under a mistake, or the requirement for restitutio in integrum where rescission is granted). It is an important but still relatively narrow category of causes of action, and much narrower than that for which Mr Rabinowitz has contended.
Mr Rabinowitz was critical of the decision of the Court of Appeal as having paid insufficient attention to the statutory language and the traditional equitable rules, and too much attention to the report of the Law Revision Committee. In his reply (day 5, page 136) he invited the court to read the first sentence of para 23 of the report as if it had contained a parenthesis, saying:
“Where mistake is not an essential part of the claim because we know that’s what the equitable rule is.”
In support of this he relied on Brooksbank v Smith (1836) 2 Y & C Ex 58 and Denys v Shuckburgh (1840) 4 Y & C Ex 42, another decision of Alderson B sitting in the equity side of the Court of Exchequer.
As to the statutory language, the criticism is in my view misplaced. The Court of Appeal cited and agreed with Pearson J’s view that the wording is carefully chosen to indicate a category of actions with particular characteristics. As to the report of the Law Revision Committee, it showed (as would be expected of its distinguished membership) a full awareness of the historical background. The parenthesis suggested as a gloss by Mr Rabinowitz is not borne out by the example that comes at the end of the first sentence of para 23, that is money or property transferred under a mistake, where the mistake is an essential part of the claim, and would have to be pleaded with some particularity.
The authorities cited by Mr Rabinowitz do not support the wide equitable jurisdiction for which he contended. Brooksbank v Smith 2 Y & C Ex 58 was about a will trust. The testatrix died in 1818 leaving a fund in trust, subject to a life interest, for her children in equal shares, with substitutional gifts if any child predeceased her leaving issue. Her daughter Elizabeth did predecease her by two months, but on the death of the life tenant in 1827 the trustees were given incorrect information about the date of Elizabeth’s death and her share (£1,000 nominal of stock) was transferred to her widower instead of to her children. When the mistake was discovered in 1833 the trustees claimed £100 stock (which was all that remained unsold) from Elizabeth’s widower. The bill was issued within six years of discovery of the mistake. Alderson B held that the claim was not statute-barred. He treated it as a proprietary claim based on a mistake of fact.
Denys v Shuckburgh 4 Y & C Ex 42 was similar, though the facts were more complicated. Under a marriage settlement made in 1793 Earl Pomfret settled two quarter shares in some lead mines in Yorkshire on trusts under which he had both an immediate life interest and an ultimate reversion (with intermediate trusts that in due course failed). In 1813 the Earl (whose marriage was childless and ended in judicial separation) sub-settled (but only during his own lifetime) one quarter share on his sister, Lady Caroline, and another on her son William. Lady Caroline owned another quarter share of the mines in her own right. In 1826 the Earl assigned the whole of his reversionary interest to William. On the Earl’s death in 1830 no one adverted to the fact that the 1813 sub-settlement then came to an end, and the right to income from one-quarter share of the mines passed from Lady Caroline to her son William. He went abroad in 1832 and Lady Caroline died in 1835. The mistake was not discovered until 1839, when William brought a bill against his mother’s estate to recover arrears of income.
Alderson B stated the principle at, p 53:
“The plaintiff contends, that he has established that this receipt has been by mistake of fact, and that this is on the same footing as fraud, and prevents the operation, if made out, of the Statute of Limitations; which in equity is adopted as a guide, but is not at law binding on the court. I agree in that conclusion, if the circumstances of the case warrant it. But here, it seems to me, that the plaintiff had the means, with proper diligence, of removing the misapprehension of fact under which I think he did labour. He had in his power the deed on which the question turns; and, although it is perhaps rather obscurely worded, still I think he has allowed too much time to elapse not to be fairly considered as guilty of some negligence; and a Court of Equity, unless the mistake be clear, and the party be without blame or neglect in not having discovered it earlier, ought, in the exercise of a sound discretion, to adopt the rule given by the statute law as its guide.”
He also referred, during counsel’s argument, to the position at common law. As it happened part of the misapplied income was represented by identifiable lead ore stored at Richmond. When counsel for the plaintiff argued that Lady Caroline became liable to an action for money had and received only when she sold the lead, Alderson B commented, at p 48:
“If she sold the lead and received the produce, you might have waived the tort, and brought an action for money had and received. But then the Statute of Limitations runs from the conversion, and not from the time of receiving the money.”
These authorities were cited to Warrington J in In Re Robinson [1911] 1 Ch 502. There the mistake was on a fairly arcane point of law, that an entail created by royal grant as a reward for services cannot be barred: Robinson v Giffard [1903] 1 Ch 865. That decision showed that deeds executed over 40 years before and intended to bar an annuity granted in tail by King Charles II were ineffective. The claim was to recover arrears of the annuity. Warrington J identified, at p 513 three types of case where there is no time-bar for recovery of mistaken payments by trustees: (1) when an estate is being administered by the court; (2) proprietary claims to recover identifiable trust assets or their traceable proceeds; and (3) claims against third parties in knowing receipt of trust property. By contrast the claim before him:
“is in substance a mere money demand to which a Court of Equity, acting by analogy to the statute, would apply the same period of limitation. I think, therefore, that the plaintiff’s claim is barred by the statute, and that the action fails.”
The analysis in In Re Robinson was followed by Romer J in In Re Mason [1928] Ch 385 and approved by the Court of Appeal on appeal in that case [1929] 1 Ch 1. That was a claim, brought after a very long lapse of time, to recover an estate that had been taken by the Crown as bona vacantia. In the Court of Appeal Lord Hanworth MR distinguished, at p 9, between the discovery of a mistake which was a cause of action and discovery of the evidence needed to prove the cause of action. He said:
“It is suggested by Miss Mason that it is only when she found proof of the marriage of Maria L’Epine’s parents that she was entitled to bring this claim. A confusion seems to have arisen between the power to prove a claim and the right to bring it. The cause of action on which this claim is founded arose so far back as one of the three dates I have mentioned, 1798, 1801 or 1831, and the last of these dates is nearly 100 years ago. The fact that the useful evidence did not turn up until 1921 does not affect the date when the cause of action arose.”
In re Blake [1932] 1 Ch 54 was another bona vacantia case, though the interest had been assigned by the Crown to third parties. Maugham J stated, p 60:
“An action in the Chancery Division brought by the next of kin against a person to whom the administrator had wrongly paid part of the personal estate of the intestate under a mistake of fact (not joining the administrator and seeking administration) would be in the nature of a common law action for money had and received, and the Court acting on the analogy of the Statute of James I (21 Jac 1, c 16) would hold the claim to be barred after the lapse of six years from the date of payment: see In Re Robinson [1911] 1 Ch 502, where the law is elaborately explained by Warrington J, and In Re Mason [1928] Ch 385; [1929] 1 Ch 1. A common law action of the same character, assuming that such an action would lie, would also be barred by the same statute after the expiration of six years from the date of payment: Baker v Courage & Co [1910] 1 KB 56, 63. On the other hand there is no doubt that in a proper case the next of kin might bring an action in the Chancery Division to follow the trust property if the defendant to whom the administrator had paid it were still in possession of it.”
The last relevant authority is an obiter passage in the monumental judgment of the Court of Appeal in In Re Diplock [1948] Ch 465. It was concerned with both personal and proprietary claims against numerous charities. The claims arose in consequence of the executors’ calamitous distribution of the testator’s valuable residuary estate in the mistaken belief that it was held on a valid charitable trust. The executors had by then compromised claims against them personally. In relation to a point which was not determinative Lord Greene MR, delivering the judgment of the court, observed at pp 515-516:
“If [the respondent charities] seek to bring the case, for the purposes of the defence of limitation, within section 2 of the [Limitation Act 1939] and to rely upon the reasoning in In Re Blake [1932] 1 Ch 54, they must do so by averring that the cause of action is analogous to the common law action for money had and received. And if they assert the analogy, they must take it with its attributes and consequences. Beyond doubt, it would appear that in the case of an action at common law to recover money paid under a mistake of fact, section 26 would now operate to postpone the running of time. It is true that no such action would lie where the mistake is one of law: but for reasons which we have already given we do not accept the respondents’ contention that the ‘analogous’ claim in equity will also lie only where the mistake was one of fact. In our judgment, therefore, assuming the analogy (as it must be assumed if section 2 is to apply at all) the action is one for the recovery of money paid away by mistake – albeit by the mistake of other persons and by a mistake of law – and in our judgment, on this assumption, is an action for relief from the consequences of mistake no less than would be an action at common law to recover money paid away under a mistake of fact.”
The analogy with the common law action for money paid under a mistake is a recurring feature of these authorities. Indeed, the analogy goes right back to the great case of Moses v Macferlan (1760) 2 Burr 1005, the fountain-head of the English law of unjust enrichment. This has been explained in a recent article by the Hon Justice W M C Gummow of the High Court of Australia, “Moses v Macferlan 250 Years On” (2010) 84 Austl LJ 756, (2011) 68 Washington and Lee Law Review 881, 882-888, citing Moses v Macferlan at 97 E R 676, 679-680 and Clark v Shee and Johnson (1774) 1 Cowp 197, 199-200 for the proposition that the action for money had and received was “a liberal action in the nature of a bill in equity”.
In the old authorities the matter is sometimes treated simply as a case of mistake, without further analysis. But in the cases where the period was or might have been extended the mistake seems to have been an essential ingredient in the cause of action. Dr James Edelman, in “Limitation Periods and the Theory of Unjust Enrichment” (2005) 68 MLR 848, reads Denys v Shuckburgh differently. In this he follows Franks, whose monograph on Limitation of Actions (1959) suggests, at p 206 that the decision in Phillips-Higgins v Harper was too narrow:
“In particular it seems clear that a beneficiary under a will or trust who claims directly against a person to whom trust property has been wrongfully transferred can rely upon the mistake of the personal representative or trustee to postpone the running of time; although his cause of action rests upon his own title and the defendant’s lack of title to the property – and the action would be just the same if the property had been transferred purposely, ie, with knowledge that the recipient was not entitled.”
But Franks goes on to comment that if Pearson J’s view is rejected the scope of section 26 might be dangerously expanded.
In a footnote to the passage about title to trust property Franks comments that mistake is not an essential allegation and adds:
“Indeed it may be doubted whether even in a common law action to recover money paid by mistake (ie money had and received to the use of the plaintiff) the mistake is an essential allegation though it would of course in practice be pleaded: see Bullen & Leake, 3rd ed, 45, 50; 10th ed, 227-228.”
This footnote may be thought to anticipate modern controversies about absence of basis in unjust enrichment. In a case like Denys v Shuckburgh 4 Y & C Ex 42 the claimant’s cause of action rests both on his antecedent title and on his mistake. If Lady Caroline’s son had known the true position throughout, but had expressly or impliedly authorised the mine manager to continue paying income to his mother, he would have had difficulty recovering the payments even within the limitation period.
Doubts about Phillips-Higgins v Harper have been expressed not only by Franks and Edelman but also (in a rather more muted way) in Chitty on Contracts, 30th ed (2008) para 28-088; Goff and Jones, The Law of Restitution, 7th ed (2007) paras 43-004 to 43-006, and (renamed The Law of Unjust Enrichment) 8th ed (2011) paras 31-33 to 33-36; H M McLean, “Limitation of Actions in Restitution” [1989] CLJ 472, 493-495. Professor Burrows in a note on DMG in the Court of Appeal is generally supportive of Phillips-Higgins v Harper: (2005) 121 LQR 540, 544. In DMG in the House of Lords Lord Hoffmann and I expressed some doubts, but Lord Scott of Foscote supported Phillips-Higgins v Harper: [2007] 1 AC 558, paras 22, 91, 147. Lord Hoffmann observed (para 22):
“The Kleinwort Benson case [1999] 2 AC 349 is recent authority for the proposition that an action for restitution of money paid under a void contract can fall within this description [‘for relief from the consequences of a mistake’]. That does not seem to me inconsistent with the existence of the mistake not being essential to the cause of action but merely one example of a case which falls within a more general principle, just as one could have (say, for the purposes of limitation) a category called ‘clinical negligence’ without implying that it is a cause of action different in nature from other kinds of negligence.”
That is a reminder (and in view of current debates about “absence of basis” a timely reminder) that “cause of action” can bear different meanings, depending on the context.
Having considered the matter with the benefit of much fuller argument than in DMG I have reached the clear conclusion that Phillips-Higgins v Harper was rightly decided, and that we should not seek to develop the law by broadening the interpretation of “an action for relief from the consequences of a mistake.” My reasons are essentially the same as the Court of Appeal’s. In summary, as to the statutory language, I agree with Pearson J’s view that the words have been carefully chosen, and are more precise than some formula such as “based” or “founded” on a mistake. That is an imprecise formula, and legal scholars seem to take different views as to whether it would provide a wider or a narrower test than the words of the statute. As to history, the authorities are rather short on clear exposition of the relevant principles of equity, but on the whole they provide little support for Mr Rabinowitz’s thesis. Their clearest message is the close analogy between the equitable jurisdiction and the common law action to recover money paid under a mistake.
As to policy, departure from Pearson J’s relatively narrow interpretation would bring a real risk (as Franks put it, at pp 206-207) that “the scope of [section 32(1)(c)] might be expanded dangerously close to the basic rule of common law limitation that ignorance of the existence of a cause of action does not prevent time from running.” It would be difficult to find any principled stopping-place for the expansion. The leading case of Cartledge v E Jopling & Sons Ltd [1963] AC 758 (in which this point was not even faintly argued) would be seen to have missed the point. The limits (and indeed the rationale) of sections 11 and 14A of the Limitation Act 1980 would have to be revisited. Further complications would be introduced into claims for pure economic loss for breaches of professional duties of care. Any such developments are a matter for the Law Commission and for Parliament, not for this court.
Must there be a demand?
At first instance, Henderson J referred to the Woolwich principle in para 245 of his judgment and directed himself in these terms:
“Conversely, a Woolwich claim must involve, at least in some sense, the making of a demand by the Revenue, whereas there is no need for a demand in cases of [payment under a mistake]”.
Later in his discussion of the point he referred to the decision of the Court of Appeal in NEC [2006] STC 606, which was decided in the period between the decisions of the Court of Appeal and the House of Lords in DMG. In NEC the Court of Appeal held that since the companies in question had not made a group income election, ACT was lawfully payable, and there had been no unlawful demand (see especially the judgment of Mummery LJ at paras 152 to 162).
In the present case the Court of Appeal addressed this issue at paras 152 to 174 of the judgment of the court delivered by Arden LJ. The court differed from Henderson J. It accorded great respect to the judgment of Mummery LJ in NEC but did not accept that it was a binding precedent. It also pointed out, at para 169, that Mummery LJ’s conclusion (in para 162 of his judgment) tended to elide two distinct issues, that is whether ACT was lawfully due and whether it was demanded.
The Court of Appeal went on to reach a different conclusion. The heart of its reasoning is at paras 157 and 158:
“In our judgment, the judge was wrong to reject the Revenue’s submission that Woolwich alone provides a sufficient United Kingdom remedy for the San Giorgio claims of the claimants [Amministrazione delle Finanze dello Stato v SpA San Giorgio (Case 199/82) [1983] ECR 3595 – ‘San Giorgio’]. He did so because he considered that he was bound by authority to hold that it is an essential ingredient of the Woolwich cause of action that the tax was paid pursuant to a ‘demand’. We consider that authority does not require a demand, and that it is sufficient that the state has exacted tax, which was not lawfully due, by voluntary compliance by the taxpayer with the legislative imposition of the tax.
158. As a matter of principle, we do not see why a demand should be a requirement of a Woolwich claim. The underlying principle is that the Revenue should repay tax that has been exacted without legal justification. We can see no reason why the cause of action should be confined to those taxes that are payable on demand as against those, such as VAT, that are payable without a demand. Moreover, it is impossible to see why the citizen who duly accounts for and pays, by way of example, VAT, without waiting for a demand, on the assumption that the applicable legislation is valid, should be disadvantaged as against the taxpayer who refuses to account or to pay until a peremptory demand is received.”
Mr Rabinowitz criticised the Court of Appeal’s reasoning and conclusion on the following grounds (in very brief summary): first, that it was contrary to binding authority, that is the decisions of the House of Lords in Woolwich and DMG; second, that it was contrary to what he described as the “conventional understanding” of Woolwich; third, that it would create uncertainty, both as to the boundaries of any extended Woolwich principle and in the general development of the law of unjust enrichment. Mr Rabinowitz also had a further, separate argument based on the Court of Appeal’s conforming interpretation of section 231 of TA 1988 (mentioned in para 33 above). This summary does not do justice to Mr Rabinowitz’s powerful written and oral submissions but it indicates their general scope.
As the matter is now before the Supreme Court, sitting in a constitution of seven, it is unnecessary to embark on a lengthy consideration of the question of precedent. It is clear from paras 108 to 112 of his judgment in NEC [2006] STC 606 that Mummery LJ carefully considered whether it was appropriate for him to express opinions on issues of law that were not necessary to the decision. He reached the conclusion that, in the exceptional circumstances of the group litigation, he should take a course which he would not normally have taken, even though it resulted in judgment being reserved for a longer period. Mummery LJ’s views (with which Sedley and Lloyd LJJ agreed) do not bind this court, but they are entitled to great respect.
Mr Rabinowitz’s strongest point is the frequent and consistent use of the expression “demand”, not only in the speech of Lord Goff in Woolwich, but in the speeches of the other members of the House of Lords majority in that case, and in the speeches of the House of Lords in DMG. Occasional variant uses of “exaction” carry no weight, since the two words have much the same meaning (indeed, arguably “exaction” sounds rather more coercive). Mr Rabinowitz is also right in submitting that most legal scholars have understood Woolwich and DMG as laying down that an official demand is an essential prerequisite for the principle to apply. However legal scholars have also been unanimous, or almost unanimous, in expressing the view that an official demand ought not to be a prerequisite for the application of the principle.
The Law Commission in its report, Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments (1994) (Law Com No 227) took the view that a demand was not necessary (paras 6.41 to 6.42):
“Lord Goff’s reasons for the new restitutionary right, described above, also sustain these inferences, as they are based on the special position of the state and other public bodies. They do not focus on the particular requirements of a ‘demand’ or a ‘tax’; but on the manifest injustice of allowing monies unlawfully extracted from the subject by a public authority to be retained by it.
6.42. Therefore, we believe that the principle may well be held to apply to all taxes, levies, assessments, tolls or charges, whether for the provision of services or not, collected by any person or body under a statutory provision which is the sole source of the authority to charge. We do not think that the Woolwich right is limited to payment of tax or to governmental or quasi-governmental exactions, or to payments made in accordance with a demand. We believe the crucial element is that the payment is collected by any person or body which is operating outside its statutory authority, that is, it is acting ultra vires.”
The editors of Goff and Jones, The Law of Unjust Enrichment 8th ed [2011], para 22 – 15 comment, after referring to the Court of Appeal’s judgment in NEC:
“However, provided that a claimant’s money has been paid as tax –ie to discharge a supposed tax liability – it should make no difference in principle whether HMRC demanded the payment. After all, the Woolwich case itself was expressly fought and decided on the basis that the building society’s payment was not made in response to illegitimate pressure exerted by the Revenue, and as Bastarache J has observed in the Supreme Court of Canada ‘The right of [a claimant] to obtain restitution for taxes paid under ultra vires legislation does not depend on the behaviour of each party but on the objective consideration of whether the tax was exacted without proper legal authority.’ [Kingstreet Investments Ltd v New Brunswick (Finance) [2007] 1 SCR 3, para 53]”.
Professor Jack Beatson (as he then was) expressed similar views in an article (written after the Law Commission’s Consultation Paper No 120 on Restitution of payments Made Under a Mistake of Law (1991), para 3.90-3.91 but before its Report), “Restitution of Taxes, Levies and other Imposts: Defining the Extent of the Woolwich Principle” (1993) 109 LQR 401, 405:
“So, the formulation of the principle indicates that only two of the four features present in the Woolwich case – the demand and its ultra vires nature – may be necessary prerequisites. In the case of the demand even this is questionable in view of Lord Goff and Lord Slynn’s view that a payment of tax made under a mistake of law would be recoverable. The Law Commission’s Consultation Paper provisionally recommended that nothing should turn on the existence or otherwise of an actual demand for payment. Quite apart from the difficulties of distinguishing payments made in response to an ‘implied’ demand or an ‘expectation’ of payment generated by the authority (including its literature), which were mentioned, this requirement is wholly inappropriate and may pose difficulties in the context of a system based on self-assessment of tax (and other levies) such as that under consideration by the Revenue at present.”
Similar views have been expressed by Professor Charles Mitchell (English Private Law, ed Burrows, 2nd ed (2007) para 18-157); Rebecca Williams, Unjust Enrichment in Public Law (2010) pp 40-41; and Professor Burrows, The Law of Restitution 3rd ed (2011) pp 507-508.
This is a formidable volume of distinguished academic opinion. One of the main themes in the reasoning is the high constitutional importance of the principle that there should be no taxation without Parliament. As Professor Mitchell put it (English Private Law, 2nd ed para 18.156):
“One policy justification for the Woolwich entitlement mentioned by Lord Goff is that a general right to recover payments of tax levied without the authority of Parliament is needed to give full effect to the constitutional principle enshrined in article 4 of the Bill of Rights 1689, that the Crown and its ministers may not impose direct or indirect taxes without Parliamentary sanction. Another, latent in their Lordships’ speeches, is the related but wider public law principle of legality, that bodies invested with power by the state must respect the rule of law, and adhere to the limits of the jurisdictions conferred upon them.”
An earlier footnote refers to two influential articles on the same theme: Professor W R Cornish, “Colour of Office: Restitutionary Redress Against Public Authority” (1987) 14 J Mal & Comp L 41, and Professor Peter Birks, “Restitution from the Executive: a Tercentenary Footnote to the Bill of Rights” in Finn (ed), Essays on Restitution (1990) 164. These were referred to by Lord Goff in Woolwich [1993] AC 70, 166.
These high principles should not depend on the details of the procedure adopted for the levying and payment of any particular tax, especially in an age when (for reasons of economy and efficiency) the trend is towards self-assessment of as many taxes as possible. ACT was self-assessed, as already noted, and so was the tax which HMRC sought to charge under the ultra vires Income Tax (Building Societies) Regulations 1986 in Woolwich.
It is helpful to see how the arguments developed as Woolwich proceeded through the courts. The building society was successful in judicial review proceedings decided by Nolan J on 31 July 1987. The building society had anticipated that decision by issuing a writ on 15 July 1987. Nolan J gave judgment in the action on 12 July 1988, [1989] 1 WLR 137. He felt bound by authority to dismiss the action so far as it claimed interest, holding that there was an implied agreement for repayment of any ultra vires exaction, but without interest. In his judgment Nolan J made detailed findings of fact (at pp 141-142), concluding that “the requirements of the Regulations as amplified in communications from the revenue amounted on their face to lawful demands from the Crown.”
The Court of Appeal [1993] AC 70, 76-142 allowed the building society’s appeal by a majority. The majority (Glidewell and Butler-Sloss LJJ) based their decision on an ultra vires demand and a payment which was not intended to close the transaction. Ralph Gibson LJ, dissenting, held that the payment should be classified as voluntary, with an implied agreement for repayment (without interest) if tax was not due. All three members of the Court of Appeal seem to have accepted, without much discussion, Nolan J’s finding that there had been a demand. The differences between them turned on whether the building society’s response to the demand should be regarded as a voluntary payment.
The matter came before the House of Lords, therefore, on the unchallenged factual basis that there had been a demand. The House was split three-two, with Lord Keith of Kinkel and Lord Jauncey of Tullichettle basing their dissents on the absence of any improper pressure or duress: [1993] AC 70, 160-161, 192-194. There was no difference between the majority and the minority as to the significance of a demand.
In these circumstances it is in my view open to this court (whether or not it was strictly open to the Court of Appeal) to state clearly that where tax is purportedly charged without lawful parliamentary authority, a claim for repayment arises regardless of any official demand (unless the payment was, on the facts, made in order to close the transaction). The same effect would be produced by saying that the statutory text is itself a sufficient demand, but the simpler and more direct course is to put the matter in terms of a perceived obligation to pay, rather than an implicit demand. That is how it was put by Wilson J in her well known dissent in Air Canada v British Columbia (1989) 59 DLR (4th) 161, 169:
“It is, however, my view that payments made under unconstitutional legislation are not ‘voluntary’ in a sense which should prejudice the taxpayer. The taxpayer, assuming the validity of the statute as I believe it is entitled to do, considers itself obligated to pay. Citizens are expected to be law-abiding. They are expected to pay their taxes. Pay first and object later is the general rule. The payments are made pursuant to a perceived obligation to pay which results from the combined presumption of constitutional validity of duly enacted legislation and the holding out of such validity by the legislature. In such circumstances I consider it quite unrealistic to expect the taxpayer to make its payments ‘under protest’. Any taxpayer paying taxes exigible under a statute which it has no reason to believe or suspect is other than valid should be viewed as having paid pursuant to the statutory obligation to do so.”
Lord Goff stated in Woolwich that he found this reasoning “most attractive.” The Supreme Court of Canada has in recent years, in a judgment of the Court delivered by Bastarache J, unanimously approved this passage from her dissenting speech: Kingstreet Investments Ltd v New Brunswick (Finance) [2007] 1 SCR 3, para 55. In my view English law should follow the same course. We should restate the Woolwich principle so as to cover all sums paid to a public authority in response to (and sufficiently causally connected with) an apparent statutory requirement to pay tax which (in fact and in law) is not lawfully due.
Mr Rabinowitz argued that to follow that course would introduce uncertainty as to what amounts to a tax. The expression should in my view be generously construed, but there are bound to be borderline cases (the Foreign and Commonwealth Office is said to be engaged in a constant dialogue with foreign embassies in London as to whether the congestion charge is a tax). Borderline cases of that sort will arise whether or not a demand is needed. They would be likely to cause very much less difficulty than deciding, across the whole range of taxes of different sorts, what amounts to an official demand.
Mr Rabinowitz suggested that there would also be uncertainty in the general development of the English law of unjust enrichment. There is vigorous debate among legal scholars on this topic at present, and uncertainty as to the outcome. But to decide that an official demand is not a prerequisite to a claim for the recovery of tax paid when not due ought not to add appreciably to the uncertainty. It would not be a decisive step towards a general “absence of basis” principle in place of the “unjust factors” approach that has prevailed in the past. It would merely be creating, in Mr Rabinowitz’s metaphor, a rather larger island of recovery in respect of undue tax.
Finally, under this head, there is the argument based on the Court of Appeal’s conforming interpretation of section 231 of TA 1998. This was the Court of Appeal’s issue 6, addressed at paras 97 to 109 of its judgment. The test claimants’ argument is that section 231, on the interpretation adopted by the Court of Appeal, resulted in dividends from non-resident subsidiaries of a UK-resident company being treated as FII, so that a credit was available in the same way as for dividends received from UK-resident subsidiaries. Therefore, the argument goes, ACT was not unlawfully levied. The appropriate claim was a mistake claim, not a Woolwich claim. This is an ingenious variation on the approach described at para 39 above. The argument looks like another bit of self-inflicted harm for the test claimants, but they seek to turn it to their advantage.
The tactical argument is ingenious but (even if the Court of Appeal was right in its conforming interpretation, a point which may still be revisited if permission is given for a further appeal to this court) it is in my view unsound. It seeks to rewrite history. HMRC stoutly defended its position before the Court of Justice until the judgment of the Grand Chamber at the end of 2006. Until then it consistently contended that there was nothing unlawful about the ACT/FII/FIDs regime, and it performed its statutory functions on that basis. Any suggestion that section 231 of TA 1988 did not mean what it plainly appeared to mean would have been met with incomprehension and disbelief. In short, it did not administer the taxation of UK-resident companies in accordance with any conforming interpretation. The unlawful levying of tax may depend either on the text of the statute (which was on its face discriminatory and contrary to EU law) or on how the tax is administered in practice. In this case HMRC were at fault on at least one, and possibly both of these counts.
The central issues revisited
For the reasons given in paras 42 to 82 above I consider that the Court of Appeal was correct in its conclusions (i) on section 32(1)(c) of the Limitation Act 1980 and (ii) on an official demand for tax not being a prerequisite of a Woolwich claim. The last 40 paragraphs can therefore be seen as no more than a laborious detour which ultimately leads back to the central issues in the appeal, outlined in paras 38 and 39 above: is a Woolwich claim (on its own) an adequate remedy meeting the principles of effectiveness and equivalence? Or are the test claimants also entitled to regard a claim based on mistake as one which EU law will protect against summary removal by national legislation (with the consequence that the statutory cut-off provisions infringe EU law)?
The Court of Appeal answered the first of these questions in the affirmative, and the second in the negative. The relevant part of the judgment is paras 217 to 229. The court’s reasoning is quite compressed, the heart of it being in para 225:
“We have held, in respect of issues 11 and 12, that a demand is not an essential ingredient of the Woolwich cause of action, and that that cause of action provides an effective remedy for all the Claimants’ San Giorgio claims. Thus the cause of action for repayment of monies paid under a mistake is not a cause of action required by Community law. The cause of action for repayment of monies paid under a mistake is a domestic remedy of wide application, which Community law does not require the member states to provide, attended by a limitation period (ie section 32(1)(c) of the Limitation Act 1980) that goes beyond the requirements of Community law: see Marks & Spencer at paragraph [2003] QB 866, para 35, in which the court considered a three-year limitation period to be reasonable. Community law restricts the effectiveness of domestic legislation curtailing a limitation period applicable to a domestic cause of action that protects the Community right. That domestic cause of action is the Woolwich claim, and it is unaffected by sections 320 and 107.”
Mr Aaronson has criticised this reasoning as seriously flawed. The test claimants’ written case sets out an elaborate framework of five reasons, the first and second of which have been the subject of the detour at paras 42 to 82 above. The third, fourth and fifth reasons are considered in the following sections of this judgment.
Reemtsma
Mr Aaronson relied on the decision of the Court of Justice in Reemtsma Cigarettenfabriken Gmbh v Ministero delle Finanze (Case-35/05) [2007] ECR I-2425 as authority for the general proposition that EU law requires repayment of tax paid under a mistake (and not unlawfully exacted). In that case an Italian advertising agency had supplied services to a German client and the services were to be treated as supplied in Germany. The Italian supplier erroneously invoiced the client and paid VAT to the Italian tax authorities. Having failed to obtain a refund from the supplier, the German company brought proceedings against the Italian tax authorities. The Court of Justice held that it was not reimbursable under the provisions of the Eighth Directive and should normally be claimed from the supplier. “However”, (para 42) “where reimbursement of the VAT would become impossible or excessively difficult, the member states must provide for the instruments necessary to enable that recipient [of the relevant services] to recover the unduly invoiced tax in order to respect the principle of effectiveness.”
Mr Aaronson submitted that this principle was of general application, and not limited to VAT (as a specifically EU tax). He submitted that this was a mistaken payment which was within the wide San Giorgio principle but not within the Woolwich principle, however much it might be extended. In support of his submission that it was not limited to VAT Mr Aaronson referred to Danfoss AS v Skattministeriet (Case C-94/10), 20 October 2011. Denmark imposed an indirect tax on lubricants and hydraulic oils which failed to give effect to exemptions required by article 8 of Council Directive 92/81 EEC. Danfoss purchased these products in large quantities and the suppliers passed on to Danfoss the amount of unlawfully exacted tax which they had paid. Following the judgment of the Court of Justice in Braathens Sverige AB v Riksskatteverket (Case C-346/97) [1999] ECR I-3419 Danfoss claimed reimbursement direct from the Danish authorities. The Court of Justice referred to the general San Giorgio principle by which a member state is in principle required to pay charges levied in breach of EU law. This is subject to an exception if the wrongly levied charge has been passed on. Where the tax has been passed on the ultimate consumer should normally be able to recover from his supplier, but if that is impossible or unduly difficult there must be a remedy in the form of a direct claim against the tax authorities. Reemtsma was referred to as an authority for this proposition.
Lord Sumption regards this principle as limited to harmonised EU taxes, and I am inclined to agree with that. But in any event it applies to a different and relatively unusual situation, in which it is a third party, and not the original taxpayer, who is seeking to recover tax from the authorities. It does not assist the test claimants in this appeal.
EU law’s requirements as to national remedies (especially limitation periods)
There is no doubt as to the general principles regulating what EU law requires of national remedies for infringements of EU law. The principles were stated by the Grand Chamber in its judgment on the first reference in these proceedings, Case C-446/04, paras 201 to 203, in terms identical, or almost identical, to those which have been stated many times before by the Court of Justice:
“It must be stated that it is not for the court to assign a legal classification to the actions brought before the national court by the claimants in the main proceedings. In the circumstances, it is for the latter to specify the nature and basis of their actions (whether they are actions for repayment or actions for compensation for damage), subject to the supervision of the national court (see [Metallgesellschaft (Joined Cases C-397/98 and C-410/98) [2001] ECR I-1727], para 18.
202. However, the fact remains that, according to established case law, the right to a refund of charges levied in a member state in breach of rules of Community law is the consequence and complement of the rights conferred on individuals by Community provisions as interpreted by the court (see, inter alia San Giorgio (Case C-199/82) [1983] ECR 3595, para 12, and Metallgesellschaft, para 84). The member state is therefore required in principle to repay charges levied in breach of Community law Comateb (Joined Cases C-192/95 to C-218/95) [1997] ECR I-165, para 20, and Metallgesellschaft, para 84).
203. In the absence of Community rules on the refund of national charges levied though not due, it is for the domestic legal system of each member state to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (principle of equivalence) and, secondly, that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness) (see, inter alia, Rewe (Case C-33/76) [1976] ECR 1989, para 5, and Comet (Case C-45/76) [1976] ECR 2043, paras 13 and 16; and, more recently, Edis (Case C-231/96) [1998] ECR I-4951, paras 19 and 34; Dilexport (Case C-343/96) [1999] ECR I-579, para 25; and Metallgesellschaft, para 85).”
This brings us to the fourth and fifth reasons in the test claimants’ written case, which go to the heart of this appeal. They contend that in using the mistake cause of action to vindicate their EU rights they were unquestionably entitled to the protection of EU law. They criticise the Court of Appeal for having asked the wrong question: that is for having asked which domestic remedies give effect to the San Giorgio principle, rather than considering, as they should have done, all national remedies as available for the purpose.
It is not necessary to multiply references to the general principles, which are not in dispute. It is however necessary to look more closely at the attitude of EU law towards limitation of actions under the legal systems of different member states, and towards legislative measures taken by member states to curtail limitation periods, so far as they affect national remedies for breaches of EU law.
It is well established that EU law has no general objection to limitation periods being provided for in the legal systems of member states. On the contrary, limitation periods are one manifestation of the principle of legal certainty. As long ago as Rewe I (Rewe-Zentralfinanz eG v Landwirtschaftskammer fur das Saarland (Case C-33/76) [1976] ECR 1989, para 5, the Court of Justice (after referring to the general principle of national courts acting in accordance with national rules) observed:
“The position would be different only if the conditions and time-limits made it impossible in practice to exercise the rights which the national courts are obliged to protect. This is not the case where reasonable periods of limitation of actions are fixed. The laying down of such time-limits with regard to actions of a fiscal nature is an application of the fundamental principle of legal certainty protecting both the taxpayer and the administration concerned.”
There is a similar statement, again expressly linked to fiscal proceedings, in Comet BV v Produktschap voor Siergewassen (Case C-45/76) [1967] ECR 2043, para 18.
Limitation periods must be reasonable, but the Court of Justice recognises that national systems vary a good deal, and accepts different approaches so long as there is no infringement of the principles of effectiveness and equivalence, and no disappointment of legitimate expectations. This is made clear in Amministrazione delle Finanze dello Stato v Sas MIRECO (Case C-826/79) [1980] ECR 2559, paras 11 to 13, and other cases of the same vintage involving the Italian tax authorities, including Amministrazione delle Finanze dello Stato v Denkavit Italiana Srl (Case C-61/79) [1980] ECR 1205, paras 23 and 24, and Amministrazione delle Finanze dello Stato v Ariete SpA (Case C-811/79) [1980] ECR 2545, paras 10 and 11.
In line with that approach, in Haahr Petroleum v Abenrå Havn (Case C-90/94) [1997] ECR I-4085, a five-year period was accepted as reasonable for reimbursement of an unlawful goods duty. Emmott v Minister for Social Welfare (Case C-208/90) [1993] ICR 8 was distinguished ([1997] ECR I-4085, para 52) because in that case the relevant directive had not been properly transposed, and until its proper transposition time was not to start to run. In Edilizia Industriale Siderurgica Srl v Ministero delle Finanze (Case C-23/1996) [1998] ECR I-4951 a three-year period was accepted for recovery of company registration charges levied in breach of article 10 of Council Directive 69/335/EEC despite the fact that the normal limitation period for restitution, under article 2946 of the Italian Civil Code, was ten years.
The principles of effectiveness, equivalence and legitimate expectation also apply if a national legislature enacts a measure to curtail an existing limitation period, especially if the measure appears to be directed at a particular ruling of the Court of Justice. The leading authority is the first judgment of the Court of Justice in Marks & Spencer Plc v Customs and Excise Comrs (Case C-62/00) [2003] QB 866 (“M&S”). That litigation was complicated and protracted, involving as it did two distinct claims for repayment of VAT (one concerning gift vouchers, and the other concerning chocolate-covered marshmallow teacakes) which were linked together as a matter of case management. There were two references to the Court of Justice, the first of which attracted criticism from the court because of its restricted scope. The final chapter in the saga is reported at [2009] UKHL 8, [2009] STC 452. For present purposes, however, it is sufficient to note that section 47 of the Finance Act 1997 curtailed the period for a claim for repayment of VAT from six to three years, with retrospective effect, and without any period of grace. Some of the claimant’s claims for VAT on teacakes (which were properly treated as zero-rated) went back to 1973.
The Advocate General (Geelhoed) referred to a summary ([2003] QB 866, para 54) of the EU jurisprudence in Roquette Frères SA v Direction des Services Fiscaux du Pas-de-Calais (Case C-88/99) [2000] ECR I-10465, para 20. He also cited at para 57, Dilexport (Case C-343/96) [1999] ECR I-579, para 43:
“Community law does not preclude the adoption by a Member State, following judgments of the Court declaring duties or charges to be contrary to Community law, of provisions which render the conditions for repayment applicable to those duties and charges less favourable than those which would otherwise have been applied, provided that the duties and charges in question are not specifically targeted by that amendment and the new provisions do not make it impossible or excessively difficult to exercise the right to repayment.”
The Advocate General pointed out (para 58) that the retrospective alterations to the Value Added Tax Act 1994 affected “not only taxable persons who expected under the existing rules to have ample time to make their claims but even taxable persons who before the date on which the announcement of a change in the law was made (18 July 1996) or prior to the date on which it was enacted (19 March 1997) had made claims for repayment of unduly levied tax.”
The issue of specific targeting was raised at first instance, but in view of the conclusions which he had already reached Henderson J preferred to express no view on it ([2009] STC 254, paras 428 to 431). His reasons included the difficulty of the constitutional issues which would arise in inquiring into the legislative intention behind the amending legislation. The point was not raised in the Court of Appeal or in this court.
The Court of Justice reached conclusions similar to those of the Advocate General [2003] QB 866, paras 36 to 38:
“Moreover, it is clear from Aprile [2001] 1 WLR 126, para 28 and Dilexport [1999] ECR I-579 paras 41 and 42 that national legislation curtailing the period within which recovery may be sought of sums charged in breach of Community law is, subject to certain conditions, compatible with Community law. First, it must not be intended specifically to limit the consequences of a judgment of the Court to the effect that national legislation concerning a specific tax is incompatible with Community law. Secondly, the time set for its application must be sufficient to ensure that the right to repayment is effective. In that connection, the court has held that legislation which is not in fact retrospective in scope complies with that condition.
37. It is plain, however, that that condition is not satisfied by national legislation such as that at issue in the main proceedings which reduces from six to three years the period within which repayment may be sought of VAT wrongly paid, by providing that the new time limit is to apply immediately to all claims made after the date of enactment of that legislation and to claims made between that date and an earlier date, being that of the entry into force of the legislation, as well as to claims for repayment made before the date of entry into force which are still pending on that date.
38. Whilst national legislation reducing the period within which repayment of sums collected in breach of Community law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right.”
The Court of Justice held the amending legislation incompatible with the principle of effectiveness. It also (paras 45 and 46) held that it was precluded by the principle of the protection of legitimate expectations.
Legitimate expectations
The principle of protection of legitimate expectations is closely linked to the principle of legality. But in the opinion of the Advocate General (Cosmas) in Duff v Minister for Agriculture and Food, Ireland and Attorney General (Case C-63/93) [1996] ECR I-569, para 23, the two are not interchangeable.
The Advocate General’s opinion contains (at paras 24 and 25) a passage about timing which is of particular interest (his emphasis):
“24. . . . Particularly for the individual the principle of legality would in many ways lose its significance as a guarantee of a sphere of freedom, if the temporal succession of legal provisions concerning him was not governed by an elementary consistency and coherence sufficient to enable him to discern the consequences (legal and financial) of his activities.
25. Thus the principle of legal certainty calls for clarity and accuracy in framing the rules of law, and the individual provisions giving effect to them, which at a given moment in time constitute the legal framework within which the competences of the institutions are exercised and the activities of individuals are carried on. The principle of the protection of legitimate expectations requires the Community legislature and the other Community organs (or the national authorities operating under provisions of Community law) to exercise their powers over a period of time in such a way that situations and relationships lawfully created under Community law are not affected in a manner which could not have been foreseen by a diligent person.”
This approach was not in terms adopted by the Court of Justice, but para 20 of its judgment appears to be in line with it.
I have quoted this passage at some length because it seems to me to touch on what is, if I may respectfully say so, one of the crucial points in Lord Sumption’s judgment. Lord Sumption ultimately bases his conclusions, on the central issue, on the principle of protection of legitimate expectations (paras 198 to 202). He observes (para 196) that the right of the test claimants to choose from a range of causes of action is a right derived solely from English procedural law and (echoing the Court of Appeal, para 226) that it exists only to the extent that English law so provides. I have considerable difficulty in reconciling that with the principles stated by the Advocate General and the Court of Justice in M&S [2003] QB 866. But before addressing that difficulty I should recapitulate the sequence of events in which the statutory cut-off provisions were announced and enacted.
The enactment of the statutory cut-off provisions
Mr Aaronson provided a useful summary of the key dates. The first two are the decisions of the House of Lords in Woolwich (20 July 1992) and Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (29 October 1998). After 1998 English lawyers knew that the recovery of money paid under a mistake of law (perhaps including a mistake of tax law, subject to arguments on exclusive remedies) had become a real possibility, although it was by no means a firmly established cause of action. But until the decision of the Court of Justice in Metallgesellschaft (Joined Cases C-397/98 and C-410/98) [2001] Ch 620 on 8 March 2001 there was no general appreciation that the UK corporation tax regime was seriously open to challenge as infringing the Treaty. Henderson J did not make any detailed findings about this, since the principle of legitimate expectations does not seem to have been argued as a separate issue before him. But he did (para 267) make a general finding of fact about mistake:
“The unlawful payments of ACT made from 1973 to 1999, and the unlawful payments of ACT made under the FID regime from 1994 to 1999, were in my view plainly made under a mistake about the lawfulness of the tax regimes under which they were paid. I am satisfied from the evidence, both written and oral, that this was not obvious to anybody within the BAT group at the time, since everybody proceeded on the footing that the tax in question was lawfully due and payable.”
After 8 March 2001 a well-advised multinational group based in the UK would have had good grounds for supposing that it had a valid claim to recover ACT levied contrary to EU law, with at least a reasonable prospect that the running of time could be postponed until then (but not subsequently) by the operation of section 32(1)(c) of the Limitation Act 1980. During 2002 the opinion of the Advocate General and the judgment of the Court of Justice in M&S, while possibly not adding much to the earlier jurisprudence, spelled out very clearly, for UK companies and lawyers, both the capacity and the limits of national legislation in curtailing limitation periods in proceedings for recovery of tax levied in breach of EU law.
The next important date was 18 July 2003, when Park J gave his first-instance judgment in DMG. This was the first judicial decision which positively upheld a claim for repayment of unduly levied tax with an extended limitation period under section 32(1)(c). But appeals to the Court of Appeal and the House of Lords were to follow and (as Henderson J observed, para 406), “the outcome of those appeals was, at the time, impossible to predict with any confidence.”
The BAT group started its proceedings on 18 June 2003, a month before Park J’s judgment in DMG. On 8 September 2003 the Paymaster General announced the introduction of retrospective legislation affecting proceedings to recover tax on the ground of mistake if the proceedings were issued on or after that day (the scope of the proposed legislation was later extended to include amendment of existing proceedings). The Aegis group issued its proceedings on that very day, 8 September 2003, and so was one of the very first claimants to be affected by the legislation.
Section 320 of the Finance Act 2004 was enacted on 24 June 2004. Its essential provisions were set out by Henderson J (para 408):
“Exclusion of extended limitation period in England, Wales and Northern Ireland
(1) Section 32(1)(c) of the Limitation Act 1980 . . . (extended period for bringing an action in case of mistake) does not apply in relation to a mistake of law relating to a taxation matter under the care and management of the Commissioners of Inland Revenue.
This subsection has effect in relation to actions brought on or after 8 September 2003.
(2) For the purposes of–
(a) section 35(5)(a) of the Limitation Act 1980 . . . (circumstances in which time-barred claim may be brought in course of existing action), and
(b) rules of court . . . having effect for the purposes of those provisions,
as they apply to claims in respect of mistakes of the kind mentioned in subsection (1), a new claim shall not be regarded as arising out of the same facts, or substantially the same facts, if it is brought in respect of a different payment, transaction period or other matter.
This subsection has effect in relation to claims made on or after 20 November 2003.
. . .
(6) The provisions of this section apply to any action or claim for relief from the consequences of a mistake of law, whether expressed to be brought on the ground of mistake or on some other ground (such as unlawful demand or ultra vires act).
(7) This section shall be construed as one with the Limitation Act 1980 . . .”
The Court of Appeal gave judgment in DMG, reversing Park J, on 4 February 2005: [2006] Ch 243. Mr Aaronson described the Court of Appeal’s decision as a “bump in the road”, suggesting that it was unforeseen and soon forgotten, but that seems an inappropriate description, even with hindsight. Reference to the judgments (running to nearly 300 paragraphs in all) shows that numerous issues were fiercely contested, including the date of the mistakes discovery (which occurred, on HMRC’s argument, in 1995). The Court of Appeal’s decision was reversed by the House of Lords on 25 October 2006: [2007] 1 AC 558. Shortly afterwards the UK government applied to the Court of Justice for the reopening of the hearing of the first reference in these proceedings so that the United Kingdom could argue for a temporal restriction to the judgment of the Court of Justice. That application was rejected on 6 December 2006, and on the same day HMRC announced the introduction of further retrospective legislation.
This was enacted on 19 July 2007 as section 107 of the Finance Act 2007. The essential terms of the section were set out by Henderson J (para 412):
“Limitation period in old actions for mistake of law relating to direct tax
(1) Section 32(1)(c) of the Limitation Act 1980 . . . (extended period for bringing action in case of mistake) does not apply in relation to any action brought before 8 September 2003 for relief from the consequences of a mistake of law relating to a taxation matter under the care and management of the Commissioners of Inland Revenue.
(2) Subsection (1) has effect regardless of how the grounds on which the action was brought were expressed and of whether it was also brought otherwise than for such relief.
(3) But subsection (1) does not have effect in relation to an action, or so much of an action as relates to a cause of action, if–
(a) the action, or cause of action, has been the subject of a judgment of the House of Lords given before 6 December 2006 as to the application of section 32(1)(c) in relation to such relief, or
(b) the parties to the action are, in accordance with a group litigation order, bound in relation to the action, or cause of action, by a judgment of the House of Lords in another action given before that date as to the application of section 32(1)(c) in relation to such relief.
(4) If the judgment of any court was given on or after 6 December 2006 but before the day on which this Act is passed the judgment is to be taken to have been what it would have been had subsections (1) to (3) been in force at all times since the action was brought (and any defence of limitation which would have been available had been raised).
. . .
(6) In this section–
‘group litigation order’ means an order of a court providing for the case management of actions which give rise to common or related issues of fact or law . . .”
On 30 September 2010 the European Commission announced that it had made a formal request to the UK to change section 107 of the Finance Act 2007. On 26 January 2012 there was a further announcement that the European Commission has referred the UK to the Court of Justice because of the absence of proper transitional rules in section 107.
Discussion of the statutory cut-off provisions
These provisions were challenged in the lower courts primarily on the ground that they infringed the principle of effectiveness. There was little discussion of legitimate expectations. Lord Sumption holds (para 199) that reasonable persons in the position of the test claimants would not, until Park J’s judgment in DMG on 18 July 2003, have counted on being able to recover tax on the ground of mistake of law; and that even after that decision the existence of such a claim was being challenged on serious grounds. He concludes from that proposition that no one in the position of the test claimants could have had a reasonable and realistic expectation of recovering tax on the ground of mistake.
I cannot disagree with that conclusion. The issue of legitimate expectations was not raised before the judge, and he made no findings on it. The issue of reasonable expectations must of course be decided objectively, but it would have been helpful to have had the view of the judge who very carefully considered the whole case. But in any case I do have great difficulty in applying the same reasoning to upholding the validity of section 320 against attack under the principle of effectiveness, in the light of M&S. The judgment of the Court of Justice in that case lays down a clear requirement for transitional provisions, and that requirement is derived at least as much from the principle of effectiveness and the principle of legality as from the more limited principle of protection of legitimate expectations (as Advocate General Cosmas said in Duff (Case C-63/93) [1996] ECR I-569, para 23, they are not interchangeable).
If one asks what the test claimants were entitled to, and what they could expect to continue to be entitled to, in the way of national remedies to recover tax levied and paid contrary to EU law, the answer is plainly not that they were entitled to the indefinite continuation of a range of alternative remedies. The passage from Rewe II on which the test claimants rely (Rewe-Handelsgellschaft Nord mbH v Haupzollamt Kiel (Case C-158/80) [1981] ECR 1805, para 44) is, as Lord Sumption demonstrates, an example of the operation of the principle of equivalence. It is not applicable in this case because both of the statutory cut-off provisions applied to all claims for repayment of direct tax, whether or not the repayment was claimed because of an infringement of EU law.
Nor were the test claimants entitled to a remedy arrived at by some precise formula furnished by EU law. That would be contrary to the basic principles laid down in Rewe I (Case C-33/76) [1976] ECR 1989, and repeated in countless cases since then. What they were entitled to was that national law should provide an effective remedy which met the requirements of EU principles of effectiveness and equivalence; and that any curtailment of any relevant limitation period should comply with those principles, as well as with the principle of legitimate expectations. The fact that they could not have complained, in another parallel universe in which section 32 (1)(c) had never existed, is not decisive on the issue of effectiveness.
I would therefore hold that section 320 was contrary to EU law as infringing the principle of effectiveness as explained in M&S, and that section 107 was contrary to EU law both on that ground and (in agreement with Lord Sumption) under the principle of protecting legitimate expectations. Examples can be tendentious, but the drastic way in which section 320 could operate can be illustrated by the example of a UK-resident holding company, part of a multinational group, which paid ACT from 1973 to 1996, building up an ever-increasing surplus of unused ACT, and then (three years before the repeal of ACT) decided that enough was enough, and disposed of its overseas subsidiaries. In 2001 it would have learned of the possibility of a claim for repayment of tax, and taken advice as to the wisdom of incurring costs by making a claim, which was still doubtful, at some time during the next six years. In 2002 M & S (Case C-62/00) [2003] QB 866 seemed to confirm that the law would not be changed retrospectively and without reasonable notice. But if the company did not act before 8 September 2003 it would have been deprived, retrospectively and without any notice, of the entirety of its claims for over 20 years’ tax.
Section 33 of the Taxes Management Act 1970
The last substantive point to be considered is section 33 of the Taxes Management Act 1970, which provided a statutory right to repayment of tax paid by mistake, subject to a number of restrictive conditions. It replaced provisions originally introduced by the Finance Act 1923. It has since been replaced by two different sets of provisions, one applicable to individuals and the other to companies. In the form in which it was in force at the relevant time the conditions were (1) it applied only to excessive tax charged by an assessment (which meant, Lord Goff stated in Woolwich [1993] AC 70, 169, a valid assessment) as a result of an error or mistake in a return; (2) there was a six-year time limit; (3) there was to be no repayment if the erroneous or mistaken return was in accordance with practice generally prevailing at the time; and (4) the repayment was to be such as the Board of Inland Revenue (subject to a possible appeal to the Special Commissioners) considered reasonable and just. The flexibility of the last condition was explained by Mr Ewart by the example of a taxpayer who had paid too much tax six years before, but who ought to have paid more tax on the same income seven or more years before.
The issue on section 33 is whether it is an obstacle to the test claimants and if so, whether it can be given a conforming interpretation under the Marleasing principle ((Case C-106/89) [1990] ECR I-4135). In terms of the amount of tax at stake, this issue is relatively minor in the context of the litigation as a whole, as it extends only to tax charged under Schedule D, Case V, pursuant to section 18 of TA 1988. But it is still a point of some general importance. Before Henderson J HMRC argued, but only it seems quite briefly, that the decision of the Court of Appeal in Monro v Revenue and Customs Comrs [2009] Ch 69 established that section 33 was an exclusive remedy which left no room for any common law claim in unjust enrichment. The judge [2009] STC 254, paras 438-439 rejected that on two grounds: first that section 33 did not extend to tax levied otherwise than by an assessment; secondly that in any event the national legislation must, in a San Giorgio claim, yield to the principle of effectiveness. It now seems to be common ground that the first of these reasons does not hold good for tax under Schedule D Case V.
The Court of Appeal took a different approach. It concluded ([2010] STC 1251, paras 261 and 264) that a conforming interpretation was possible, and did sufficiently “go with the grain of the legislation” (the expression used in relation to section 3(1) of the Human Rights Act 1998 by Lord Rodger of Earlsferry in Ghaidan v Godin-Mendoza [2004] 2 AC 557, para 121, also adopted by Lord Nicholls of Birkenhead at para 33). The conforming interpretation adopted was (para 261) that the restrictive condition about prevailing practice in section 33(2A) “is to be read as subject to the limitation that it applies only if and to the extent that the United Kingdom can consistently with its Treaty obligations impose such a restriction”.
I have grave doubts as to whether that interpretation does not go against the grain of the legislation, since the “practice generally prevailing” condition is of long standing and has always been regarded as an important safeguard for the public revenue. I am inclined to think that Mr Aaronson was right (Day 2, pp 25-26) to call it a “cardinal feature” of the legislation. In my view the Marleasing principle can be applied in a simpler and more natural way by not construing section 33 as impliedly setting itself up as an exclusive provision (which it did not do expressly, unlike section 80 of the Value Added Tax Act 1994). The test claimants submit that the application of Marleasing cannot rework section 33 in a way that serves any relevant purpose. But to read it as non-exclusive does not go against its grain. It would merely exclude an implication which is itself no more than a process of statutory construction. In practical terms the effect is the same as that which Henderson J reached by the second limb of his reasoning. I would therefore allow the appeal on this point (although it may not, in the end, make much practical difference).
In summary, therefore, my provisional view is that we should –
(1) uphold the Court of Appeal as to (i) the scope of section 32(1)(c) of the Limitation Act 1980 and (ii) the scope of the Woolwich principle;
(2) allow the appeal on section 320 and section 107; and
(3) allow the appeal on section 33 of the Taxes Management Act 1970.
But in view of the difference of opinion in the court I consider (in common with Lord Hope, Lord Dyson and Lord Reed) that it is necessary for the court to make a further reference to the Court of Justice of the European Union in accordance with directions in para 23 of Lord Hope’s judgment.
LORD BROWN
I have had the great advantage of reading in draft the judgments of Lord Walker and Lord Sumption and am in full agreement with them both on the several issues upon which they each agree. What, then, of the single issue upon which they disagree: was section 320 of the Finance Act 2004 contrary to EU law as infringing the principle of effectiveness as explained by the Court of Justice in Marks & Spencer Plc v Customs & Excise Comrs (Case C-62/00) [2003] QB 866?
During the hearing I confess to having found difficulty in recognising any principled basis for distinguishing between on the one hand section 47(1) of the Finance Act 1997 which (with effect from when government had earlier announced its intention so to legislate: section 47(2)), besides reducing the basic limitation period for tax repayment claims from six to three years, in addition eliminated the special advantage for claims in mistake previously introduced by section 24(5) of the Finance Act 1989, delaying the commencement of the limitation period for such claims until the claimants had actually or constructively discovered the mistake – this being the provision held ineffective by the Court of Justice in Marks & Spencer; and, on the other hand, section 320 with which this court is now concerned which (similarly with effect from when government first announced its intention so to legislate) similarly eliminates with regard to tax repayment claims based on a mistake of law the similar special provision enlarging the limitation period to be found in section 32(1)(c) of the Limitation Act 1980.
Now, however, I am inclined to accept Lord Sumption’s view that, by the same token that, on the facts of this case, the appellants can establish no legitimate expectation at any time prior to 8 September 2003 (when government announced its intention to introduce section 320) that the limitation period for mistake of law tax repayment claims would not be attenuated by legislation, nor can they make good their argument that section 320 infringes the EU principle of effectiveness. The self-same considerations – essentially of fairness and legal certainty – which underlie the doctrine of legitimate expectation (both domestically and under EU law) to my mind also inform the principle of effectiveness. If, as seems to me plainly to be so, the situation even after Park J’s first-instance decision in Deutsche Morgan-Grenfell Group Plc v Inland Revenue Comrs [2003] 4 All ER 645 (“DMG”) was one of complete uncertainty as to whether tax could be re-claimed on the basis of a mistake of law – there being at least as much room for a mistake of law as to this as for the mistake of law which the majority of the House of Lords in DMG [2007] 1 AC 558 held the taxpayers to remain under until the Court of Justice’s final authoritative decision in the Hoechst case (Metallgesellschaft Ltd v Inland Revenue Comrs (Joined Cases C-397/98 and C-410/98) [2001] Ch 620) – there was to my mind neither unfairness nor any denial of a legitimate expectation from Parliament stepping in to legislate with immediate effect to clarify the situation (albeit to the taxpayers’ obvious disadvantage given that the common law was finally to be developed in their favour).
In short, whereas the position as to limitation with regard to tax recovery claims was crystal clear under section 24 of the 1989 Act – and could not therefore fairly and legitimately be altered without due notice and appropriate transitional provisions – it was entirely unclear under the developing common law when Parliament chose to intervene by the enactment of section 320. And it is that which provides the principled basis for distinguishing this case from Marks & Spencer.
Section 107, by contrast, is not merely overtly retrospective (eliminating pre-existing claims explicitly preserved by section 320), but was introduced after the House of Lords decision in DMG finally resolved the uncertainty in the law and proclaimed (albeit subject always to lawful legislative change) that mistake of law claims with their extended limitation periods were indeed available to those seeking recoupment of overpaid (or prematurely paid) tax. Small wonder that it is section 107 that the Commission selected for attack.
LORD CLARKE
In para 9 above Lord Hope has conveniently identified four issues for determination in this appeal. Issues (3) and (4), which raise a question of construction of section 32(1)(c) of the Limitation Act 1980 and the ingredients of the common law Woolwich claim respectively, raise no issue of EC law. I agree with the other members of the court that, for the reasons they give, the decisions of the Court of Appeal on both questions should be upheld and that both questions should be answered no. At the end of the argument I was inclined to the view that section 32(1)(c) should be given the wider meaning contended for by the Test Claimants, but I have been persuaded by the reasoning of Lord Walker and Lord Sumption that it should not.
I also agree with the other members of the court that the restitution and damages remedies sought by the Test Claimants are not excluded by section 33 of the Taxes Management Act 1970 and that it follows that question (2) must be answered no and that the Test Claimants’ appeal on this issue must succeed. This seems to me to be essentially a matter of construction of section 33. In so far as it involves an issue of EU law, I would hold that it is acte clair, and would not refer it to the Court of Justice.
By contrast, the questions posed by issue (1) raise difficult questions of EU law. This is evident from the differences of opinion between members of the court. A comparison between the judgments in this case shows that the members of the court are divided, not only as to the question whether EU law protects the mistake claims and, in particular, whether section 320 of the Finance Act 2004 infringes the EU law principles of effectiveness, legal certainty and legitimate expectation, but also as to the correct reasoning for the conclusions reached. I too would refer the section 320 issues to the Court of Justice.
If there is to be a reference, any further analysis of the position by me will be largely, if not entirely, redundant, since all will depend upon the conclusions ultimately reached by the Court of Justice. I will therefore only add this. I agree that section 107 infringes EC law for the reasons given by Lord Sumption. As to section 320, in agreement with Lord Hope, Lord Walker, Lord Dyson, and Lord Reed my provisional view is that the appeal should be allowed.
The problem (or potential problem) facing the Test Claimants is that English law provides two remedies for their claim that tax has been exacted from them contrary to EU law. If the only available remedy were the mistake claim, the position would be clear. It would fall within the principle in Marks & Spencer Plc v Customs and Excise Comrs (Case C-62/00) [2003] QB 866 (“M&S”), which is discussed in some detail by Lord Walker at paras 96 to 99. The principle is summarised both by the Advocate General and by the Court of Justice at paras 36 to 38 (quoted at para 99 above). It applies in respect of national legislation curtailing the period within which recovery may be sought of sums charged in breach of EU law and may be summarised as follows: (1) such legislation must not be intended specifically to limit the consequences of a judgment of the Court of Justice to the effect that national legislation concerning a specific tax is incompatible with EU law; (2) the time set for its application must be sufficient to ensure that the right to repayment is effective; and (3) where a new limitation period limits the previously permitted period, the new period must be reasonable and the new legislation must include transitional arrangements allowing an adequate period for lodging claims which were available under the previous legislation.
As Lord Walker explains at para 104, after 8 March 2001, when the Court of Justice decided Metallgesellschaft Ltd v Inland Revenue Comrs (Joined Cases C-397/98 and C-410/98) [2001] Ch 620, the Test Claimants would have had good grounds for supposing that they had a good claim to recover ACT levied contrary to EU law, with at least a reasonable prospect that the running of time could be postponed until then by section 32(1)(c) of the Limitation Act 1980. In so far as proceedings had not been issued, their claims were therefore in time as at 8 September 2003 when HMRC announced the introduction of what became section 320 of the Finance Act 2004. The effect of section 320, which is set out at para 107 above and was enacted on 24 June 2004, was to deprive those Test Claimants of rights which were available to them by reason of section 32(1)(c) without any transitional provisions to allow them to issue proceedings within a reasonable time.
But for the availability of the Woolwich claim, section 320 would therefore be contrary to the principles clearly set out in M&S. It made it impossible for those Test Claimants to proceed with their mistake claim because of the absence of the introduction of a reasonable period of limitation as from then and because of the complete absence of transitional provisions. The facts are very similar to those relating to the chocolate covered marshmallow teacakes in M&S.
Does the existence of the Woolwich remedy make all the difference? I agree with Lord Hope, Lord Walker, Lord Reed and Lord Dyson that it does not. To my mind it would be remarkable if it did. In this regard, I agree in particular with the reasoning of Lord Hope at paras 16 to 19 above. As Lord Hope shows, the Test Claimants had every prospect of success. It is plain from the fact that section 320 was enacted that HMRC shared that view, since (at any rate as it seems to me) the whole point of the section was to ensure that such a claim would not succeed. In any event, in the period before section 320 came into force the Test Claimants were entitled to have their mistake claim adjudicated upon by the English courts. In my opinion they had a legitimate expectation that, as Lord Hope puts it at para 19 and Lord Reed puts it at para 243, that entitlement would not be removed from them by the introduction without notice of a limitation period that was not fixed in advance.
Before the decision in Deutsche Morgan Grenfell Group Plc v Inland Revenue Comrs [2007] 1 AC 558 (“DMG”) the Test Claimants knew that there was a reasonable prospect that they had a good mistake of law claim against the Revenue. I agree with Lord Sumption (at para 201) that it must be relevant to ask on what basis the Test Claimants must be taken to have made their plans and that the issue is whether there is an assumption reasonably to be attributed to them about how long they had to bring their claims, which was then retrospectively falsified by Parliament. It seems to me that they can reasonably be taken to have made their plans on the basis of an expectation that the State would not remove their rights without warning or transitional provisions. That expectation was then retrospectively falsified by section 320.
In all these circumstances, I prefer the reasoning of Lord Hope and Lord Reed to that of Lord Sumption. It follows that in my opinion section 320 infringes their rights under EC law on the ground that it infringes the principle of legitimate expectation.
In addition I agree with Lord Hope, Lord Walker, Lord Dyson and Lord Reed that an application of the principle of effectiveness also leads to the conclusion that section 320 infringes their rights under EC law. This part of the case has been analysed in some detail by Lord Hope, Lord Walker and Lord Reed. In particular, Lord Reed’s analysis is considerably more extensive than that of Lord Walker. As I read Lord Reed’s judgment, a critical part of his reasoning is his reliance upon his view of the principles of equivalence, which he then deploys in reaching his conclusion that section 320 infringes the principle of effectiveness. His reasoning is to my mind convincing and, for the reasons he gives, I too would so hold.
I have a slight concern that so to hold is to determine the issue on a basis which was not advanced in argument on behalf of the Test Claimants, which (to put it no higher) is surprising given the many years they have been considering these issues. However, if the Court of Justice were to prefer the approach to equivalence adopted by Lord Sumption to that adopted by Lord Reed, I would nevertheless hold that section 320 infringes the principle of effectiveness. Although there is, so far as I am aware, no decision of the Court of Justice which directly addresses the point, this conclusion seems to me to receive some support from the opinion of Advocate General Sharpston in Unibet (London) Ltd v Justitiekanslern (Case C-432/05) [2008] All ER (EC) 453, where she said this at para 32 of her opinion:
“The starting point to my mind must be the principle, first laid down in Rewe I [(Case 33/76) [1976] ECR 1989, para 5], that it is for the domestic legal system of each member state to determine the procedural conditions governing actions at law intended to ensure the protection of Community law rights, provided that those conditions are not less favourable than those relating to similar actions of a domestic nature (principle of equivalence) and do not make it impossible in practice to exercise those rights (principle of effectiveness). That approach was confirmed in Rewe II [(Case 158/80] [1981] ECR 1805, para 44], where the court stated that the Treaty was not intended to create new remedies in the national courts to ensure the observance of Community law other than those already laid down by national law and that the system of legal protection established by the Treaty implies that it must be possible for every type of action provided for by national law to be available for the purpose of ensuring observance of Community provisions having direct effect.” (Original emphasis)
I recognise that, as Lord Sumption observes at para 194, Rewe-Handelsgellschaft Nord mbH v Haupzollamt Kiel [1981] ECR 1805 was an equivalence case and that the Court of Justice did not expressly comment upon this passage, but it nevertheless seems to me that in her para 32 the Advocate General was putting the point more generally in the context of effectiveness and that, in that context it provides some support for the Test Claimants’ case.
I appreciate that the views that I (and others) have expressed on the section 320 point can only be provisional and that it will ultimately be resolved in the light of the answers to the questions referred to the Court of Justice. I nevertheless hope that these views will be of some assistance in the formulation of those questions.
LORD DYSON
I too agree with the judgments of Lord Walker and Lord Sumption on all the issues on which they agree. Like Lord Hope and Lord Reed, I agree with Lord Walker on the DMG/section 320 issue. Nevertheless, I acknowledge the force of Lord Sumption’s reasoning on this issue. For that reason I have concluded that the question cannot be regarded as acte clair and that a reference to the European Court of Justice is necessary.
LORD SUMPTION
Introduction
It is not in dispute that under EU Law, the United Kingdom is bound to provide an effective means under its national law of recovering tax charged contrary to the EU Treaty. It is common ground that it is open to member states to impose reasonable periods of limitation, even on actions to enforce directly effective EU law rights. It is also common ground that six years is a reasonable period of limitation for an action to recover tax charged contrary to EU law, and that if English law had always provided for the period to run from the date of payment in cases of mistake, then that too would have been reasonable. Broadly stated, the issue on this appeal is whether the United Kingdom was entitled to change the law relating to the running of the limitation period, without notice or transitional provisions for actions which were pending or in the pipeline. The commissioners say that the change related only to actions to recover tax paid under a mistake of law and that there are other causes of action unaffected by the change which satisfy the United Kingdom’s obligation to provide an effective means of recovering the tax. The Test Claimants say, in bald summary, (i) that every cause of action available to them for common law restitution is, on analysis, an action for relief against the consequences of a mistake and therefore affected by the change, (ii) that so far as there are other causes of action available to them which are not affected by the change, they are subject to legal limitations which make it impossible to regard them as an effective means of recovery, and (iii) that irrespective of the fate of points (i) and (ii) the United Kingdom was not entitled to curtail, without notice or transitional provisions, the availability of any cause of action which might serve their purpose.
In my judgment, the Test Claimants and other companies in their position have an effective means of recovering the overpaid tax under the principle stated by the House of Lords in the landmark decision in Woolwich Equitable Building Society v Inland Revenue Commrs [1993] AC 70. The availability of that cause of action entirely satisfies the obligations of the United Kingdom under the EU Treaty, notwithstanding that it is subject to a limitation period which runs from the date of payment. Neither section 320 of the Finance Act 2004 nor section 107 of the Finance Act 2007 had any impact on a claim made on that basis, because both enactments were concerned only with actions for the recovery of tax paid under a mistake of law. Mistake of law is a more limited cause of action, which is neither necessary nor sufficient to satisfy the obligations of the United Kingdom under the EU Treaty. In those circumstances, I consider that the validity of those enactments depends entirely on whether they defeated the legitimate expectations of taxpayers as that concept is understood in EU law. I do not think that section 320 of the Finance Act 2004 can be criticised on that ground. Its effect was that the limitation period for an action to recover tax paid under a mistake of law was to run from the date of payment in the same way as the limitation period for an action to recover tax on any other ground. It was announced almost as soon as the existence of a right to recover tax paid under a mistake of law had been judicially recognised. It follows that taxpayers in the position of these claimants cannot at the relevant time have had any reasonable expectation that a cause of action to recover tax paid under a mistake of law would be available to them. For that reason, I think that they would suffer no injustice if section 320 of the 2004 Act were to be given effect according to its terms, whereas a significant injustice would be suffered by the general body of taxpayers if it were not. Different considerations apply to section 107 of the 2007 Act, which was retrospective in an altogether more radical and objectionable sense. It does not surprise me that the European Commission has referred the enactment of 2007 to the European Court of Justice, but has taken no comparable step in the case of the enactment of 2004.
I propose in this judgment to deal first with the general principles of EU law which are relevant, and on which I believe that there is substantial agreement among the members of the court. I shall then address the argument that a claim to recover overpaid corporation tax on the principle in Woolwich Equitable is not enough to satisfy those principles. I shall then, finally, return to EU law to consider the main question which has divided this court, namely whether, even if English law did not need to make available a right to recover the tax on the footing of mistake, having done so it could lawfully curtail the limitation period for that right retrospectively and without warning or transitional provisions.
EU law
Unlike Value Added Tax and certain other taxes and duties which are required and directly regulated by EU law, corporation tax is a creature of the domestic law of the United Kingdom. Apart from the limited requirements of Directive 90/435/EEC relating to withholding tax and double taxation relief, it is not subject to any EU scheme of harmonisation. Like other national tax systems, however, corporation tax is affected by EU law because it must be assessed and collected on a basis consistent with the Treaty. In particular, it must comply with the requirements of the single market, including the freedom of establishment and the free movement of capital guaranteed by what are now articles 49 and 63 of the Treaty: Commission v France (Case C-270/83) [1986] ECR 273; Staatssecretaris van Financien v Verkooijen (Case C-35/98) [2000] ECR I-7321.
The internal market is a domain in which competence is shared between the institutions of the EU and those of member states under article 4 of the Treaty. It follows that even in cases where EU law confers direct rights on private parties, it is for national courts applying national law to determine what rights of action are available against member states to vindicate those rights, and subject to what procedural or other conditions. In Rewe-Zentralfinanz eG v Landwirtschaftskammer fur das Saarland Case 33/76 [1976] ECR 1989 (Rewe I), the principle was stated at para. 5 in terms which have been repeated or paraphrased in many cases decided since:
“it is the national courts which are entrusted with ensuring the legal protection which citizens derive from the direct effect of the provisions of Community law. Accordingly, in the absence of Community rules on this subject, it is for the domestic legal system of each member state to designate the courts having jurisdiction and to determine the procedural conditions governing actions at law intended to ensure the protection of the rights which citizens have from the direct effect of Community law, it being understood that such conditions cannot be less favourable than those relating to similar actions of a domestic nature. Where necessary, articles 100 to 102 and 235 of the Treaty enable appropriate measures to be taken to remedy differences between the provisions laid down by law, regulation or administrative action in member states if they are likely to distort or harm the functioning of the Common Market. In the absence of such measures of harmonization the right conferred by Community law must be exercised before the national courts in accordance with the conditions laid down by national rules. The position would be different only if the conditions and time-limits made it impossible in practice to exercise the rights which the national courts are obliged to protect.”
One consequence of this, as the court pointed out in Metallgesellschaft Ltd v Inland Revenue Comrs (Joined Cases C-397/98 and C-410/98) [2001] Ch 620, para 81, is that the nature, basis and legal classification of rights of action available for this purpose in the national court is a matter for national courts:
“It must be stressed that it is not for the court to assign a legal classification to the actions brought by the plaintiffs before the national court. In the circumstances, it is for the claimants [Metallgesellschaft Ltd. and others and Hoechst AG] to specify the nature and basis of their actions (whether they are actions for restitution or actions for compensation for damage), subject to the supervision of the national court.”
This is, however, subject to the overriding requirement derived from the Treaty and referred to in the passage which I have quoted from Rewe I, that national legal systems should provide a minimum standard of protection for EU law rights. In the case law of the Court of Justice, the standard of protection required is embodied in two principles which are restated in almost every decision on the point. First, the substantive and procedural provisions of national law must be effective to protect EU law rights (the “principle of effectiveness”). Their enforcement in national law must not be subject to onerous collateral conditions or disproportionate procedural requirements. They must not render “virtually impossible or excessively difficult” the exercise of rights conferred by EU law. Secondly, the relevant provisions of national law must not discriminate between the rules and procedures applying to the enforcement of EU law rights, and those applying to the enforcement of comparable national law rights (the “principle of equivalence”). There is a third principle which features less prominently in the case law on this subject but is of considerable importance because it informs the approach of the Court of Justice to the first two. This is the principle of legal certainty, which lies at the heart of the EU legal order and entails (among other things) that those subject to EU law should be able clearly to ascertain their rights and obligations. One aspect of that principle is that within limits EU law will protect within its own domain legitimate expectations adversely affected by a change in the law.
The leading case on the principle of effectiveness is Amministrazione delle Finanze dello Stato v SpA San Giorgio (Case 199/82) [1983] ECR 3595. This concerned charges levied for frontier health inspections of imported animals or animal products under Italian legislation but contrary to EU law. Italian law provided for the recovery of the charges on conditions that were in themselves perfectly acceptable, but which were in practice almost impossible to satisfy because of the exacting rules of evidence applicable to such claims. The court held (para 12):
“In that connection it must be pointed out in the first place that entitlement to the repayment of charges levied by a member state contrary to the rules of Community law is a consequence of, and an adjunct to, the rights conferred on individuals by the Community provisions prohibiting charges having an effect equivalent to customs duties or, as the case may be, the discriminatory application of internal taxes. Whilst it is true that repayment may be sought only within the framework of the conditions as to both substance and form, laid down by the various national laws applicable thereto, the fact nevertheless remains, as the court has consistently held, that those conditions may not be less favourable than those relating to similar claims regarding national charges and they may not be so framed as to render virtually impossible the exercise of rights conferred by Community law.”
These principles were restated in the judgments of the European Court of Justice in Metallgesellschaft [2001] Ch 620, paras 84-86 and in the first reference in this litigation: FII Group Litigation v Inland Revenue Comrs (Case C-446/04) [2007] STC 404, paras 201-208. It follows that a member state is “in principle required to repay charges levied in breach of Community law”: Société Comateb v Directeur Général des Douanes et Droits Indirects (Joined Cases C-192/95 to 218/95) [1997] ECR I-165, para 20. Subsequent case law has emphasized the absolute character of this obligation. The only exception which has been recognized to date is the case where the charge has been passed on by the party who paid it, with the result that he would be unjustly enriched were he to recover it for his own benefit: see Weber’s Wine World Handels GmbH v Abgabenberufenskommission Wien (Case C-147/01) [2003] ECR I-11365, para 94. So, although national courts and legislatures are the masters of their own law and procedure, in so far as the legal system of a member state fails to give adequate effect to directly effective EU law rights, it is incumbent on national courts to give effect to those rights by filling the gap between existing causes of action or if necessary to create a new one: see Unibet (London) Ltd v Justitiekanslern (Case C-432/05) [2008] All ER (EC) 453, paras 40-1.
The combined effect of (i) the requirement of EU law that there must be an effective right of recovery of tax charged contrary to that law and (ii) the primacy of national law as the source of that right, is that EU law does not, indeed cannot, require that national law should recognise or create any particular cause of action or any particular remedy. It simply requires that whatever causes of action or remedies exist in national law must, taken as a whole, be effective and non-discriminatory.
The implications of these principles for the operation of rules of limitation in national systems of law is the subject of a considerable body of case law in the Court of Justice. Not only is limitation a feature of every national legal system of the EU, but the recognition of national rules of limitation as both necessary and desirable is treated as part of the principle of legal certainty in EU law. In Rewe I [1976] ECR 1989, one of the first cases to come before the Court of Justice about the application of limitation periods to claims to enforce directly effective rights in the area of tax, the court observed (para 5) that “the laying down of such time-limits with regard to actions of a fiscal nature is an application of the fundamental principle of legal certainty protecting both the tax-payer and the administration concerned.” This is so, notwithstanding that “the effect of that rule is to prevent in whole or in part the repayment of those charges”: Haahr Petroleum Ltd v Åbenrå Havn (Case C-90/94) [1997] ECR I-4085, para 45. Subject to the overriding principles of effectiveness and equivalence, EU law recognizes the public interest in orderly national budgeting and equity between generations of taxpayers, which will generally require rules for establishing clear limits beyond which tax accounts may not be reopened.
In the present appeals it has not been argued that section 320 of the Finance Act 2004 or section 107 of the Finance Act 2007 are inconsistent with the principle of equivalence. I do not find that surprising. The two enactments with which we are concerned apply in precisely the same way to claims to recover taxes charged contrary to domestic and EU law. So far as they create practical limitations on a claimant’s choice of legal route to recovery, they have precisely the same effect whether the charging of the tax was contrary to EU or domestic law. It is not suggested in these appeals that either enactment offended against the principle in Deville v Administration des Impôts (Case 240/87) [1988] ECR 3513 on the ground that they were specifically targeted at the assertion of rights under EU law. We are therefore concerned on these appeals only with the principle of effectiveness and the principle of the protection of legitimate expectations.
The fundamental requirement of the principle of effectiveness is that limitation periods should be reasonable, ie not so short as to make recovery by action “impossible or excessively difficult”: see Rewe I, [1976] ECR 1989, and Comet v Produktschap voor Siergewassen …Case 45/76) [1976] ECR 2043, paras 16-18. But the assessment of what is reasonable allows for considerable variation between different national systems. There is abundant case-law concerning limitation periods much shorter than six years, which have been held to be reasonable. Moreover, it is not inconsistent with the principle of effectiveness that under national law the limitation period for the recovery of unlawful charges should run from the time of payment: see Edilizia Industriale Siderurgica Srl (Edis) v Ministero delle Finanze (Case C-231/96) [1998] ECR I-4951, para 35, Ministero delle Finanze v SPAC (Case C-260/96) [1998] ECR I-4997, para 32. Nor is there any rule of EU law requiring the running of a limitation period to be deferred until the existence of a right to recover the payment has been judicially established. It is not uncommon for a claim to repayment to have become time-barred in national law while proceedings are still in progress to determine whether the member state was in breach of EU law. This was, for example, the position in Rewe I. It was also the position in many of the decisions about the retrospective curtailment of limitation periods, which I shall consider next.
The curtailment of an existing limitation period gives rise to special considerations. There are two objections that might in principle be taken to it. First, even if the change applies only to future claims, it is likely to operate retrospectively to some extent. It will usually extinguish the possibility of enforcing existing rights to recover sums which have already been paid and could in due course have been reclaimed and recovered under the previous law, but are time-barred under the new one. This necessarily engages the principle of effectiveness. Of course, the legislation may also be retrospective in the more radical sense of abrogating claims that have already been properly made under the old law. The second potential objection is that to the extent that the change is retrospective, it may offend against the principle of legal certainty. People must be taken to appreciate that the law may be changed. But until it is, they are entitled to organise their affairs on the basis of the law as it stands and to assume a sufficient measure of predictability in its future development to enable them to exercise their EU law rights. This means that if they have already paid money which is in principle recoverable, they are entitled to be guided by the existing law when deciding how long they have left in which to claim. This objection is commonly analysed as depending on the principle of the protection of legitimate expectations. But this is not really a distinct principle. It has been described as “the corollary of the principle of legal certainty, which requires that legal rules be clear and precise, and aims to ensure that situations and legal relationships governed by Community law remain foreseeable”: Duff v Minister of Agriculture, Ireland (Case C-63/93) [1996] ECR I-569, para 20. It is one manifestation of the broader principle that those subject to the law should be able to ascertain their rights and obligations at the time that they are called on to decide what to do about them.
EU law might have taken an absolute line on national legislation retrospectively extinguishing the possibility of enforcing existing rights to recover money charged contrary to EU law. In fact, it has taken a more flexible and nuanced position. It follows from the liberty given to member states to devise their own domestic law means of giving effect to EU rights, that national legislatures are in principle entitled to change their laws. Because they are not obliged to provide more than the minimum level of protection for EU rights necessary to make them effective, the changes may adversely affect claims to assert EU rights, provided that the new law still provides an effective means of doing so. The compromise which EU law has adopted between these conflicting considerations is to allow the retrospective curtailment of limitation periods within limits set by the principle of the protection of legitimate expectations. Legislation curtailing limitation periods is in principle consistent with the principle of effectiveness provided that a period of grace, which may be quite short, is allowed, either by giving sufficient advance notice of the change or by including transitional provisions in the legislation. These propositions are derived from the four leading decisions of the Court of Justice on this question, namely Aprile Srl v Amministrazione delle Finanze dello Stato (Case C-228/96) [2000] 1 WLR 126 (Aprile II), Dilexport Srl v Amministrazione delle Finanze dello Stato (Case C-343/96) [1999] ECR I-579, [2000] All ER (EC) 600, Grundig Italiana SpA v Ministero delle Finanze (Case C-255/00) [2003] All ER (EC) 176, and Marks & Spencer v Customs & Excise Comrs (Case C-62/00) [2003] QB 866.
The first two cases had a similar legal background. Italy had unlawfully levied charges equivalent to customs duties, which the claimant sought to recover under Italian law. Italian law conferred a general right to recover payments made without legal basis (“pagamento non dovuto”) under article 2033 of the Civil Code, which was subject to the general limitation period of ten years provided for by the article 2946 of the Code. In addition, there was a specific right to a refund under the Consolidated Customs Code in cases of “calculation errors in the assessment or the application of a duty other than that laid down in the tariff”, which was subject to its own limitation period of five years. The latter right had no application to a claim for a refund of tax charged contrary to Community law. These provisions were amended by legislation so that the limitation period in the Customs Code applied to actions under article 2033 whenever the claim was for a “refund of sums paid in connection with customs operations.” In other words, the limitation period for the only relevant right of recovery, under article 2033, was reduced from ten years to five. It is clear that the decisive considerations which led the Court of Justice to conclude that the amendment was consistent with the EU law were (i) that the reduced limitation period was still long enough to satisfy the principle of effectiveness and (ii) that the Italian courts had treated the amending legislation as allowing claimants a period of grace of three years from the time the amending legislation came into force, which meant that the legislation “cannot be regarded as having retrospective effect”; see Aprile II, para 28 and Dilexport, para 42. This was not enough to help the claimants, for the period of grace had already expired by the time that they succeeded in obtaining a judicial decision that the charges were unlawful. But it was held to be enough to satisfy the principle of effectiveness.
In Grundig Italiana [2003] All ER (EC) 176, the Court of Justice had to consider the minimum transitional period which would enable a retrospective curtailment of the limitation period to satisfy EU law. The case concerned the same amending legislation which had featured in Aprile II and Dilexport, but a different aspect of it, namely the reduction of the special limitation period from five years to three, which took effect ninety days after the legislation came into force. This transitional period was held to be too short. The court considered that a period of grace must be “sufficient to allow taxpayers who initially thought that the old period for bringing proceedings was available to them a reasonable period of time to assert their right of recovery in the event that under the new rules they would already be out of time” (para 38). In the context of an original limitation period of five years, six months was the least that should have been allowed (para 42). It is accordingly clear that a reasonable period of grace may be considerably shorter than the amount by which the limitation period has been abridged. It is a period long enough to allow potential claimants to consider their position, not a period long enough to save every existing right of recovery.
In none of the Italian cases was separate consideration given by the Court of Justice to the principle of the protection of legitimate expectations. But that principle must necessarily have informed the court’s analysis of what was required by the principle of effectiveness. The point was made in terms by Advocate-General Ruiz-Jarabo in his opinion in Grundig Italiana, where he observed that a retrospective reduction in the limitation period without a period of grace would be contrary to the principle of effectiveness “on the grounds that the reduction is unexpected and contrary to the principle of the protection of legitimate expectations and to the principle of legal certainty” (para 30). The court must have agreed with that. It was critical to its view that legislation retrospectively curtailing an existing limitation period so as to bar some existing rights, would nevertheless be consistent with the principle of effectiveness if it allowed a sufficient period of grace for taxpayers to adjust their plans to the new order of things.
In Marks & Spencer [2003] QB 866, the facts were more complex. It was a reference from the Court of Appeal in England about a claim to recover VAT unlawfully charged by the Commissioners of Customs and Excise. By statute, the only right to obtain a refund from the Commissioners was by way of a claim under section 24 of the Finance Act 1989 (subsequently section 80 of the Value Added Tax Act 1994). Subsections (4) and (5) of section 24 provided for a six year limitation period, which was to run from the date of payment save in cases of mistake, when it was to run from the time when the mistake was or could with reasonable diligence have been discovered. On 18 July 1996, the government announced its intention of introducing what later became section 47(1) of the Finance Act 1997. The effect of this enactment was to reduce the limitation period for the statutory claim from six years to three, and to provide that it was to run in all cases from the time of payment. Section 47(2) provided that subsection (1) should be deemed to have come into effect on 18 July 1996 and should apply to all claims unsatisfied at that date whether made before or afterwards. There were no relevant transitional provisions. The reference was concerned with a claim to recover VAT overpaid on sales of gift vouchers. This claim was affected by the reduction of the limitation period to three years. It was not affected by the removal of the extended period of limitation in cases of mistake, because the relevant payments had all occurred within six years before the claim was made. But the facts are complicated by the existence of another claim, to recover VAT paid in respect of sales of teacakes going back to 1973, which was significantly affected by the removal of the extended limitation period. The teacakes claim was not part of the reference: see the Advocate-General at para 27. But before us a submission was based on it by Mr Aaronson QC (for the Test Claimants) because of the analogy with the removal of the extended period of limitation in the present case. It is therefore right to point out that it arose only in the context of a “preliminary observation” of the Advocate-General about the way in which the Court of Appeal had framed the reference. The Court of Appeal had limited it to (i) the gift vouchers claim, (ii) the reduction of the limitation period from six years to three, and (iii) the period before August 1996 when the Sixth VAT Directive 77/388/EEC had been in force but not properly transposed into the law of the United Kingdom. The Advocate-General, while acknowledging that the court was bound by the terms of the reference, pointed out that it had been framed on the assumption that the Directive had no further relevance as a source of rights once it had been properly transposed into English law in August 1996. This assumption was in his opinion wrong: paras 32-34. He thought that the Court of Appeal’s error about the period in which the Directive was relevant had led it to treat the whole of the teacakes claim and the later part of the gift vouchers claim as depending only on national law: see paras 30 and 44, and his citations from the judgments of the High Court and the Court of Appeal at para 32. None of this had anything to do with the compatibility of section 47 of the Finance Act 1997 with EU law. The Court of Justice, in its judgment, agreed that the Court of Appeal’s assumption about the Directive was mistaken (paras 22-28), but dealt only with the application of the 1997 Act to the gift vouchers claim: see para 13.
The Court of Justice had no difficulty in concluding that section 47 was contrary to the principle of effectiveness. There was only one means allowed by English law of recovering overpaid VAT, and the effect of the amendment was to extinguish without notice any possibility of using that method to recover overpayments between three and six years old. Indeed, it extinguished it even when there was already a pending claim at the date of the announcement. The court took the opportunity to restate the effect of previous case law in the following terms:
“35. As regards the latter principle, the court has held that in the interests of legal certainty, which protects both the taxpayer and the administration, it is compatible with Community law to lay down reasonable time-limits for bringing proceedings: Aprile, paragraph 19, and the case-law cited therein). Such time-limits are not liable to render virtually impossible or excessively difficult the exercise of the rights conferred by Community law. In that context, a national limitation period of three years which runs from the date of the contested payment appears to be reasonable (see, in particular, Aprile, paragraph 19, and Dilexport, paragraph 26).
36. Moreover, it is clear from the judgments in Aprile [2000] 1 WLR 126, para 28, and Dilexport [1999] ECR I-579, paras 41 and 42, that national legislation curtailing the period within which recovery may be sought of sums charged in breach of Community law is, subject to certain conditions, compatible with Community law. First, it must not be intended specifically to limit the consequences of a judgment of the court to the effect that national legislation concerning a specific tax is incompatible with Community law. Secondly, the time set for its application must be sufficient to ensure that the right to repayment is effective. In that connection, the court has held that legislation which is not in fact retrospective in scope complies with that condition.
37. It is plain, however, that that condition is not satisfied by national legislation such as that at issue in the main proceedings which reduces from six to three years the period within which repayment may be sought of VAT wrongly paid, by providing that the new time-limit is to apply immediately to all claims made after the date of enactment of that legislation and to claims made between that date and an earlier date, being that of the entry into force of the legislation, as well as to claims for repayment made before the date of entry into force which are still pending on that date.
38. Whilst national legislation reducing the period within which repayment of sums collected in breach of Community law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right.”
The decision is also notable as being the one case in this area in which the court has given separate and explicit consideration to the principle of the protection of legitimate expectations. It did so because it was expressly invited to deal with both effectiveness and legitimate expectations by the terms of the Court of Appeal’s reference. But it dealt with the point under both heads. In dealing with the principle of effectiveness, it observed (para 38) that the principle of effectiveness required that potential claimants should be given time to assert existing rights under the old law. This was because (para 39) the right of member states to impose reasonable limitation periods was an exception to the rule that member states must repay taxes charged in breach of Community law, and that exception was founded on the principle of legal certainty. “However, in order to serve their purpose in ensuring legal certainty, limitation periods must be fixed in advance.” In other words, the curtailment of limitation periods is consistent with the principle of effectiveness if it is subject to provisions protecting legitimate expectations. As the Advocate General had pointed out in his opinion (para 68), the principle of protecting legitimate expectations is based on the need for legal certainty. Addressing the same point, the court held:
“44. In that connection, the court has consistently held that the principle of the protection of legitimate expectations forms part of the Community legal order and must be observed by the member states when they exercise the powers conferred on them by Community directives: see, to that effect, Krücken (Case 316/86) [1988] ECR 2213, para 22, Alois Lageder SpA v Amministrazione delle Finanze dello Stato …Joined Cases C-31 to C-44/91) [1993] ECR I-1761, para 33, Belgocodex v Belgian State (Case C-381/97) [1998] ECR I-8153, para 26, and Grundstückgemeinschaft Schlossstrasse GbR v Finanzamt Paderborn (Case C-396/98) [2000] ECR I-4279, para 44).
45. The court has held, in particular, that a legislative amendment retroactively depriving a taxable person of a right to deduction he has derived from the Sixth Directive is incompatible with the principle of the protection of legitimate expectations (Schlossstrasse, cited above, paragraph 47).
46. Likewise, in a situation such as that in the main proceedings, the principle of the protection of legitimate expectations applies so as to preclude a national legislative amendment which retroactively deprives a taxable person of the right enjoyed prior to that amendment to obtain repayment of taxes collected in breach of provisions of the Sixth Directive with direct effect.”
Whether it is put on the basis of the principle of effectiveness or the protection of legitimate expectations or on a combination of the two, the rule of EU law which requires a reasonable period of grace before a retrospective curtailment of the limitation period can be lawful, assumes that claimants generally can legitimately count on having the whole of the old limitation period in which to bring whatever claims may be available to them as a matter of domestic law, unless they have a reasonable warning that the position is about to change. Thus far, I do not think that there is any fundamental difference in principle between my views and those of other members of the court.
The assumption that a claimant can legitimately count on having the whole of the old limitation period in which to bring whatever claims are available to him is one which would normally be made as a matter of course. But this is not an ordinary case. The position is complicated by the highly unusual way in which the right to recover unlawfully charged tax has developed in England over the last two decades. It is a problem which could only have arisen in a common law country such as England, where the law of restitution has been the piecemeal creation of judges while limitation is exclusively the creature of statute. To these peculiarly English developments, I now turn.
Rights of recovery in English law
Until surprisingly recently, English law afforded only very limited possibilities of recovering overpaid tax. As Lord Goff of Chieveley observed in Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70, 172, English law had not recognised a condictio indebiti allowing an action for the recovery of payments on the simple ground that they were not due. It has still not done so. It is necessary, as the law presently stands, to bring the facts within one of the categories of case in which the law recognises that the recipient’s retention of the money would be unjust. The relevant categories as they had stood for a considerable time up to 1992 were described by Lord Goff in his speech in Woolwich Equitable at pp 164-166. Money was recoverable if it was paid under a mistake of fact, but not if it was paid under a mistake of law (as it generally would be if taxes were paid which were not duly authorised by law). It was recoverable if it was exacted by actual or threatened duress to the person or to the person’s goods, but not on a mere threat to assert a claim by a method provided for by law (for example, by legal proceedings). It was recoverable if it was demanded by a public official or a person charged with a statutory duty as a condition of his performing his duty. None of these situations was likely to cover the case where a taxpayer paid money which was not in fact due under the relevant legislation, because it had been misconstrued or was contrary to EU law, or because (being secondary legislation) it was ultra vires the enabling Act.
A limited statutory right to claim repayment from the Commissioners had been introduced in 1923 by section 24 of the Finance Act of that year. Substantially the same provision has remained in force in successive statutory iterations ever since. It is currently to be found in section 33 of the Taxes Management Act 1970. In that form, its effect is that overpaid tax may be reclaimed if (i) it was charged by an assessment, (ii) the assessment was excessive because of a mistake in the taxpayer’s return, (iii) in the case of a mistake about the basis on which the taxpayer’s liability should be computed, the return was not in the relevant respect made in accordance with the “practice generally prevailing at the time”, and (iv) having examined all the relevant circumstances of the case, the Board of Inland Revenue or the Special Commissioners on appeal from them considered that repayment would be “reasonable and just”. It will be apparent that if tax was paid under invalid or unlawful legislation the claim will almost inevitably fail on the ground that the return having been made in accordance with the statute it accorded with the practice generally prevailing at the time. Even if the taxpayer can demonstrate that his return was not in accordance with that practice, the fate of his claim will depend on the exercise of a discretion by the Commissioners. His only right is to have his claim fairly considered in the light of all relevant circumstances. As Lord Goff pointed out in Woolwich Equitable (at p 170B), historically this provision presupposed that there was no right of recovery at common law.
The first major change in this state of affairs occurred with the judgment of the House of Lords in the Woolwich Equitable case, which was delivered on 20 July 1992. The Woolwich Equitable Building Society paid the composite rate tax charged on building societies under statutory regulations which it considered to be ultra vires the enabling primary legislation, and which it then successfully challenged in proceedings for judicial review. It took this course because it was concerned about the reputational damage that it might suffer if it was seen to withhold tax which other building societies were paying, at a time when there had been no definitive decision on the status of the regulations. The Commissioners, having failed to justify the charge in the judicial review proceedings, repaid the tax, but declined to recognise that they were bound to do so and therefore felt entitled to reject a claim to interest. The question at issue was whether the Commissioners had been bound to repay the principal and were therefore amenable to an order for the payment of interest as well. Woolwich was unable to bring itself within any of the established categories of restitution. In particular, it could not claim repayment on the ground of mistake, because it had not been mistaken. It had always believed that the regulations were void. Nor could it claim under section 33 of the Taxes Management Act 1970, because there had been no assessment. It had pre-empted an assessment by paying. It followed that under the law as it had previously stood, the claim for interest was bound to fail. The question, as Lord Goff put it at p 171, was whether the House in its judicial capacity should “reformulate the law so as to establish that the subject who makes a payment in response to an unlawful demand of tax acquires forthwith a prima facie right in restitution to the repayment of the money”. The claim failed in the High Court, but it succeeded, by a majority, first in the Court of Appeal and then, on somewhat different grounds, in the House of Lords. In summary, the House of Lords fashioned a cause of action which was (i) acknowledged to be new, (ii) specific to the case of money charged by a public authority in the absence of a valid statutory power to do so, and (iii) available irrespective of whether the payer was mistaken or whether, if he was mistaken, his mistake was one of fact or law.
It was not necessary in Woolwich Equitable to consider the rule that money paid under a mistake of law was irrecoverable. That question came before the House of Lords in 1998 in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, one of the last cases to be decided in the great tide of litigation arising out of ultra vires interest rate swap agreements with local authorities. Kleinwort Benson had made net payments to the local authorities under the terms of these agreements, which they claimed had been made under a mistake of law, namely that they were valid. In the High Court, Langley J dismissed the claims on the ground that the law did not recognise a right to recover in these circumstances. The case was leapfrogged to the House of Lords on the ground that the Court of Appeal would be bound by authority to reach the same conclusion. In the House of Lords, the bank acknowledged that the existing law did not allow the recovery of money paid under a mistake of law. For their part, the local authorities made no attempt to defend that state of the law in principle, in the face of sustained criticism by academic writers and the Law Commission, its total or partial abandonment in many common law jurisdictions, and the recognition of a wider basis of recovery, independent of mistake, in major civil law systems, notably those of Germany, France and Italy. The fundamental issue before the appellate committee was whether the law should be changed by judicial decision, or the task left to Parliament. The House allowed the appeal and recognised a right in principle to recover money paid under a mistake of law, while acknowledging that this represented “a departure, even a major departure, from what has previously been considered to be established principle”: see Lord Goff at p 378.
For a number of years it remained uncertain whether the new cause of action to recover money paid under a mistake of law extended to mistaken payments of tax. Kleinwort Benson was a case about private law transactions. In his speech Lord Goff (with whom on this point the rest of the appellate committee agreed) expressed the view at pp 381-382 that there was a distinction between claims to recover payments made in private law transactions and claims to recover payments of taxes and other charges levied by public authorities. In the latter category, payments were recoverable as of right under the principle laid down in Woolwich Equitable without the need to invoke a mistake of law, or under section 33 of the Taxes Management Act in cases of mistake to which that provision applied. Lord Goff continued at p. 382:
“Two observations may be made about the present situation… The first observation is that, in our law of restitution, we now find two separate and distinct regimes in respect of the repayment of money paid under a mistake of law. These are (1) cases concerned with repayment of taxes and other similar charges which, when exacted ultra vires, are recoverable as of right at common law on the principle in Woolwich, and otherwise are the subject of statutory regimes regulating recovery; and (2) other cases, which may broadly be described as concerned with repayment of money paid under private transactions, and which are governed by the common law. The second observation is that in cases concerned with overpaid taxes, a case can be made in favour of a principle that payments made in accordance with a prevailing practice, or indeed under a settled understanding of the law, should be irrecoverable. If such a situation should arise with regard to overpayment of tax, it is possible that a large number of taxpayers may be affected; there is an element of public interest which may militate against repayment of tax paid in such circumstances; and, since ex hypothesi all citizens will have been treated alike, exclusion of recovery on public policy grounds may be more readily justifiable.”
The Commissioners, relying mainly on this passage, subsequently contended that tax was subject to a special legal regime, and that the only cause of action at common law for the recovery of overpaid tax was a cause of action on the principle stated in Woolwich Equitable. The recognition of this basis of claim, it was said, impliedly excluded all other bases of claim apart from the statutory procedure under section 33 of the Taxes Management Act 1970.
This proposition was tested in Deutsche Morgan Grenfell Group Plc v Inland Revenue Comrs [2007] 1 AC 558. The case foreshadowed some of the issues on the present appeals, and was the genesis of section 320 of the Finance Act 2004. It concerned claims for the recovery of interest on corporation tax which the European Court of Justice had held to have been prematurely charged in Hoechst/Metallgesellschaft. The taxpayer company wanted to claim interest for the period when it was out of pocket, on the footing that the tax itself had been paid under a mistake of law. It took this course because a claim on that basis would benefit from the extended limitation period under section 32(1)(c) of the Limitation Act 1980, whereas claims based on Woolwich Equitable or section 33 of the Taxes Management Act ran from the time of payment and would have been time-barred. There were three main issues: (i) whether, in a case covered by the principle in Woolwich Equitable, a common law claim based on mistake was also available to the taxpayer; (ii) if so, what was the mistake, bearing in mind that the tax had been paid in accordance with the correct construction of the taxing Acts, which was only later shown to be inconsistent with EU law by the decision of the Court of Justice in Metallgesellschaft Ltd v Inland Revenue Comrs (Joined Cases C-397/98 and 410/98) [2001] Ch 620; and (iii) at what stage, for the purpose of section 32(1)(c) of the Limitation Act 1980, could it be said that the taxpayer “discovered… or could with reasonable diligence have discovered” that mistake, so as to start the limitation period running. Park J gave judgment on 18 July 2003. He decided all three questions in favour of the taxpayer, and held that accordingly a claim on the basis of mistake was available to it. In February 2005, the Court of Appeal unanimously overruled him and held that it was not. The House of Lords restored the judgment of Park J on 25 October 2006. On the first issue, the House held that the claimant could choose between concurrent causes of action on the principle in Woolwich Equitable and on the basis of mistake of law. On the second issue, there were some differences of reasoning within the majority of the appellate committee, but all of them agreed that by virtue of the theory that judicial decisions are deemed to declare the existing law, the taxpayer company had made a “retrospective” or “deemed” mistake. The mistake consisted in its failing to appreciate that it was entitled to make a group income election and defer the payment of tax, notwithstanding that the statute said that it did not have this right. On the third issue, the House of Lords held that under section 32(1)(c) of the Limitation Act 1980 the limitation period for a claim in respect of that mistake did not start to run simply because the claimant was aware of a worthwhile claim or of doubts about the lawfulness of the legislation. It started to run only when the Court of Justice definitively held that the relevant features of the United Kingdom corporation tax regime were contrary to EU law. The combined effect of the decisions on these three points was in one respect extremely remarkable. If tax was overpaid under a mistake of law, then provided that a claim to recover it was brought before six years had elapsed from the judgment establishing the correct legal position, there was no limit upon how far back the claim could go. In the present cases, it goes back to the accession of the United Kingdom to the Common Market in 1973. If it had arisen from a mistake of purely domestic law, it might have gone back to the inception of corporation tax in 1965. In other cases where the unlawfulness of the charge depended wholly on English law, it could in principle go back indefinitely.
It has been suggested in argument before us that once the House of Lords in Kleinwort Benson [1999] 2 AC 349 had accepted the right to recover money paid under a mistake of law, the Commissioners’ case in Deutsche Morgan Grenfell was never likely to be accepted. Its acceptance by the Court of Appeal was an aberration, a “bump in the road” to borrow Mr Aaronson’s arresting phrase. Such arguments often sound plausible in hindsight, after the highest court has laid down the law, and ultimately of course the Commissioners’ argument was not accepted. But it was nevertheless a formidable argument, to which the observations of Lord Goff appeared to lend substantial support. In Kingstreet Investments v New Brunswick (Finance) [2007] 1 SCR 3, considerations rather similar to those raised by Lord Goff had led the Supreme Court of Canada to treat claims to recover unlawfully charged tax as governed by a distinct body of constitutional principle relating to tax charged without legislative authority, and not by the general law of unjust enrichment. At least part of the Canadian court’s reasoning was that the concurrent availability of both causes of action was liable to have unacceptable collateral consequences: see paras 32-42 (Bastarache J). Indeed, the decision of the House of Lords in Deutsche Morgan Grenfell is even now not beyond academic controversy. The decision on issue (ii) is criticised by the current editors of Goff & Jones, The Law of Unjust Enrichment, 8th ed (2011), paras 22.29 – 22.31 on grounds closely related to the observations which I have quoted from Lord Goff in Kleinwort Benson. I do not intend by making these points to reopen a debate which has been settled for more than five years. My point is more straightforward: no reasonable and well-advised person could have counted on the decision in Deutsche Morgan Grenfell going the way it did on all three points, until the House of Lords delivered its judgment.
Section 320 of the Finance Act 2004 was a direct response to the decision of Park J in Deutsche Morgan Grenfell. It altered not the limitation period itself but the statutory rule postponing its commencement in cases of mistake until the taxpayer had discovered or could with reasonable diligence have discovered the mistake. It had the effect of barring older claims for repayment of tax paid under a mistake which might otherwise have succeeded. But the mischief to which section 320 was addressed was not the existence of a right to repayment, whether arising from EU or domestic law, but the problem created by Park J’s decision that section 32(1)(c) of the Limitation Act 1980 might now enable past tax accounts to be reopened without limit of time.
Is the right to bring a claim based on Woolwich Equitable an effective remedy?
Logically, the first question to be decided is whether a cause of action based on the Woolwich Equitable principle is an effective means of asserting the right to repayment required by EU law. The Test Claimants say that it is not. Therefore, the argument runs, their only effective means of recovery was by way of an action to recover on the ground of mistake, and their right to bring such an action has been unlawfully curtailed by section 320 of the Finance Act 2004. They make three points. First, they say that a claim based on Woolwich Equitable requires an unlawful demand by a public authority and is not therefore available to recover taxes such as advance corporation tax which are paid with the return, not upon an assessment or other demand by the Commissioners. Second, the Court of Appeal has held, applying the principle in Marleasing SA v La Comercial Internacional de Alimentación SA …Case C-106/89) [1990] ECR I-4135 that section 231 of the Income and Corporation Taxes Act 1988 (which provides for a tax credit in respect of distributions paid by UK resident companies) can be given a construction which, however strained, applies it to distributions by companies resident anywhere in the EU. It follows, they say, that there is nothing unlawful about section 231 which can engage the principle in Woolwich Equitable. If either of these points is right, then a claim based on Woolwich Equitable is not an effective remedy in this case. Third, the Test Claimants submit that section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007 curtail the limitation period for a claim based on Woolwich Equitable, because although such a claim does not legally depend on mistake, they were in fact mistaken. Their action is therefore an action for “relief from the consequences of a mistake” for the purposes of section 32(1)(c) of the Limitation Act 1980. If this point is right, then Parliament has without warning curtailed the limitation period for all available methods of obtaining restitution, apart from a claim under section 33 of the Taxes Management Act for a small part of the overpayment and a somewhat problematical claim for damages founded on the principle of state liability stated by the European Court of Justice in Francovich v Italian Republic (Joined Cases C-6/90 and 9/90) [1999] ICR 722, [1991] ECR I-5357. The Test Claimants need only be right on one of these three points, but in my view they are wrong on all of them.
The demand point
In spite of the importance attached to this point in argument, it can I think be dealt with quite shortly. The speeches of the majority in Woolwich Equitable [1993] AC 70 are full of expressions which, read literally and out of their analytical context, might support the suggestion that the cause of action recognised in that case was dependent on the making of an “unlawful demand”: see Lord Goff at 171F-G, 172B-C, 174C-D, 177F, Lord Browne-Wilkinson at 196G-H, 197C-H, 198B-C, G-H, and Lord Slynn of Hadley at 199B-D, 200B-C, 201D-E, 202G-203A, 204F-H, 205A-B. None of the majority in Woolwich Equitable discusses what they meant by a “demand”. But both the facts of the case and the reasoning of the majority show that they cannot have had in mind a formal demand by the Inland Revenue triggering a payment or an apparent obligation to pay.
The facts, which are succinctly set out by Ralph Gibson LJ in the Court of Appeal (pp 104-105) show that Woolwich Equitable did not pay the composite rate tax in response to a formal demand. The inspector had simply invited it to agree figures and the collector had sent it a return form. The society sent in a return computed according to the Regulations, under cover of a letter informing them that they proposed to challenge their validity in legal proceedings. They then paid without prejudice to the outcome. As Lord Goff pointed out (at p 169) no assessment was ever made, because Woolwich pre-empted it by paying.
It is fair to look for the reasoning of the House of Lords mainly in the classic analysis of Lord Goff, although similar points were made by Lord Browne-Wilkinson, who agreed with Lord Goff in terms and by Lord Slynn, who agreed with him in substance. It is apparent that the mischief which justified in Lord Goff’s eyes a special rule for unlawful charges by public authorities was (i) that no tax should be collected without Parliamentary authority, and (ii) that citizens did not deal on equal terms with the state, and could not be expected to withhold payment when faced with the coercive powers of the Revenue, whether those powers were actually exercised or merely held in reserve: see pp. 172. At pp. 175-176, Lord Goff adopted the dissenting judgment of Wilson J in the Supreme Court of Canada in Air Canada v British Columbia (1989) 59 DLR (4th) 161. In her judgment, Wilson J had expressed the view that there was a general right to recover money paid under unconstitutional legislation, and deprecated any suggestion that it must have been paid under protest. The reason, as she pointed out at p 169, was that the legislature holds out its legislation as valid and that any loss resulting from payment under it “should not fall on the totally innocent taxpayer whose only fault is that it paid what the legislature improperly said was due”. The emphasis in this reasoning was on the unlawful character of the legislation, with which in practice the citizen was bound to comply even if it might subsequently be shown to be void. This approach has subsequently been adopted by the Supreme Court of Canada in Kingstreet Investments Ltd v New Brunswick (Finance) [2007] 1 SCR 3, to which I have already referred in another context. Lord Goff not only found the reasoning of Wilson J “most attractive” (p 176D), but expressed his own conclusions in very similar terms. “In the end,” he said (p 173), “logic appears to demand that the right of recovery should require neither mistake nor compulsion, and that the simple fact that the tax was exacted unlawfully should prima facie be enough to require its repayment”. The “exaction” of which he is speaking here is not confined to demands by any particular administrative agency of the state. It includes exaction by the state by enacting void legislation, which taxpayers are likely to pay because they know that the state will act on the footing that it is valid. It is not a condition of the taxpayer’s right of recovery that it should have put the matter to the test by waiting until the Inland Revenue insisted. In a passage at p 177 which strikingly foreshadows some of the issues in the present appeals, Lord Goff assimilated the rule of English law as he had formulated it to the absolute right of recovery recognized by the European Court of Justice in San Giorgio (Case 199/82) [1983] ECR 3595 in cases where tax was charged contrary to EU law. Although the majority of the appellate committee stopped well short of adopting a concept of “absence of legal basis” as a general ground of recovery even in cases of taxation without lawful authority, Lord Browne-Wilkinson’s analysis of the legal basis of recovery in such cases was also very similar to that of the case law of the Court of Justice. Money unlawfully “demanded” was recoverable because it was paid for no consideration: see p 198.
The word “demand” as it was used in the speeches in Woolwich Equitable referred in my view simply to a situation in which payment was being required of the taxpayer without lawful authority. Nothing in the principle underlying the decision turned on the mechanism by which that requirement was communicated to the taxpayer. It is therefore a matter of supreme indifference whether it was communicated by assessment, or by some other formal mode of demand, or by proceedings for enforcement, or by the terms of the legislation itself coupled with the knowledge that the Inland Revenue would be likely to enforce it in accordance with those terms.
The Marleasing point
The Court of Appeal [2010] STC 1251, para 107 held that on the principle of conforming construction stated in Marleasing, section 231 of the Income and Corporation Taxes Act 1988 should be construed so as to remove the discriminatory features of the United Kingdom’s advance corporation tax regime. For present purposes we must assume that they were right about this. An appeal on that issue is not before us. The right to apply for permission to appeal on it has been deferred pending the outcome of the second reference to the Court of Justice and its application by the courts below. The argument of the Test Claimants is that on the assumption that the Court of Appeal’s construction is correct the legislation conformed to EU law. Therefore, it is said, the principle in Woolwich Equitable is not engaged.
Marleasing (Case C-106/89) [1990] ECR I-4135, at any rate as it has been applied in England, is authority for a highly muscular approach to the construction of national legislation so as to bring it into conformity with the directly effective Treaty obligations of the United Kingdom. It is no doubt correct that, however strained a conforming construction may be, and however unlikely it is to have occurred to a reasonable person reading the statute at the time, a later judicial decision to adopt a conforming construction will be deemed to declare the law retrospectively in the same way as any other judicial decision. But it does not follow that there was not, at the time, an unlawful requirement to pay the tax. It simply means that the unlawfulness consists in the exaction of the tax by the Inland Revenue, in accordance with a non-conforming interpretation of what must (on this hypothesis) be deemed to be a conforming statute. This is so, notwithstanding that the tax may have been paid without anything in the nature of a formal demand by the Inland Revenue. The rule as the House of Lords formulated it in Woolwich Equitable is in large measure a response to realities of the relationship between the state and the citizen in the area of tax. The fact that as a matter of strict legal doctrine a statute turns out always to have meant something different from what it appeared to say is irrelevant to the realities of power if it was plain at the relevant time that the tax authorities would enforce the law as it then appeared to be. Strictly speaking, in Woolwich Equitable itself there were no unlawful regulations, because, being ultra vires the enabling Act, they were and always had been a nullity. But that did not stop the Woolwich from recovering.
The section 32(1)(c) point
Section 32(1) is (so far as relevant) in the following terms:
“Postponement of limitation period in case of fraud, concealment or mistake
(1) …where in the case of any action for which a period of limitation is prescribed by this Act, either-
(a) the action is based upon the fraud of the defendant; or
(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or
(c) the action is for relief from the consequences of a mistake;
the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.”
The argument for the Test Claimants on these appeals is that in section 32(1)(c) actions “for relief from the consequences of a mistake” are not confined to actions where the mistake is part of the legal foundation of the claim. They extend to at least some actions where it was merely part of the history. Mr Rabinowitz QC (who argued this point for the Test Claimants) accepted some limitations of the range of relevant mistakes. He said that there had to be a sufficient causal nexus between the mistake and the claim, in the sense that the facts constituting the cause of action have come to pass because of the mistake. It followed that although the Woolwich Equitable cause of action was available to claimants in the position of his clients regardless of whether they were mistaken or not, those who were in fact mistaken in some historically relevant respect would have benefitted from the extended limitation period until the law was changed by section 320 of the Finance Act 2004. They have been deprived without notice of that right. Section 320(6) removes any doubt about this by providing that it applies “to any action or c1aim for relief from the consequences of a mistake of law, whether expressed to be brought on the ground of mistake or on some other ground (such as unlawful demand or ultra vires act)”.
Section 32(1) of the Limitation Act 1980 substantially re-enacts section 26 of the Limitation Act 1939, with one minor change to paragraph (b) (from concealment “by… fraud” to “deliberate” concealment). The Act of 1939 was a notable monument of law reform, replacing an incoherent series of statutes and equitable rules by a coherent statutory scheme. It was enacted on the recommendation of the Law Revision Committee in its Fifth Interim Report (Cmd 5334), which was prepared in 1936 under the auspices of Lord Wright, then Master of the Rolls. Section 26 substantially followed the language of the report. It is clear from paragraphs 22 and 23 of the Committee’s report that the intention was to replicate certain features of the rules applied by courts of equity in the absence of any statutory limitation period. The equitable rules on this subject had originally been developed in the context of cases involving fraud. The doctrine of laches was applied by analogy with statutory limitation at law, save that in cases of fraud time ran from the point when the fraud was discovered or could with reasonable diligence have been discovered, and not from the accrual of the right as it did at law. It is clear that fraud was relevant in equity in two circumstances, (i) that the right to equitable relief was itself based on fraud, in the sense that fraud was a legally essential element of it, and (ii) that whether or not the right to relief was based on fraud, its existence had been concealed from the plaintiff by the fraud of the defendant. The Law Revision Committee summarised the position at paragraph 22 of their report as follows:
“Either the cause of action may spring from the fraud of the defendant or else the existence of a cause of action untainted in its origin by fraud may have been concealed from the plaintiff by the fraudulent conduct of the defendant.”
In 1936, when the Committee was considering these matters, there was inconsistent authority on the question whether since the fusion of law and equity the equitable rule about the running of time in cases of fraud applied to causes of action at law. They recommended that it should. The result was section 26(a) and (b) of the 1939 Act, corresponding to section 32(1)(a) and (b) of the 1980 Act. These two paragraphs dealt with the two circumstances in which fraud was relevant to postpone the running of time in equity, as summarised in the Committee’s report. As applied to fraud neither paragraph admits of the construction now proposed by the Test Claimants. Paragraph (a) is concerned with cases where the action is “based upon” fraud, ie where it is part of the legal foundation of the claim. Paragraph (b) is concerned with cases where fraud by the defendant is not necessarily part of the legal basis of the claim, but it has concealed the relevant facts from the claimant and thereby delayed his taking action to enforce his right. The fact that fraud, although no part of the legal basis of the claim, may have brought about the factual situation which is the legal basis of the claim, does not engage either paragraph.
The reason for enacting section 26(c) of the Limitation Act 1939 (now section 32(1)(c) of the Act of 1980) was that courts of equity had previously applied the equitable rule relating to fraud by analogy to cases of mistake. As Baron Alderson put it in Brooksbank v Smith (1836) 2 Y & C Ex 58, “mistake is… within the same rule as fraud.” The Law Revision Committee considered that in this respect the rule for mistake should be the same at law, and at paragraph 23 of their report they recommended the statutory reversal of the decision in Baker v Courage [1910] 1 KB 56, which had held that it was not. Section 26(c) of the 1939 Act was the result. On the face of it, therefore, the intention behind paragraph (c) was to replicate the rule of equity by providing that mistake should give rise to an extended limitation period in the same circumstances in which fraud had that effect under paragraph (a), namely where it was the legal basis of the claim. The use of a different phraseology in (a) and (c) (an “action for relief from…” instead of “based upon”) simply reflects the phraseology used in the Committee’s discussion, which was lifted verbatim from the report by the Parliamentary draftsman. There is no indication in the report itself that the difference was thought to be significant.
It is fair to say that there are cases decided in equity before the Limitation Act 1939 where the court does not seem to have asked itself whether the mistake was the foundation of the cause of action. Brooksbank v Smith itself was one of them. Denys v Shuckburgh (1840) 4 Y& CEx 42, also decided by Baron Alderson, was another. In both cases, the reason for this appears to have been that Baron Alderson was trying to apply the equitable rule about fraudulent concealment (corresponding to section 31(1)(b)) by analogy to cases of mistake, by holding that a mistake on the part of the plaintiff which concealed from him his right was equivalent to the dishonest or deliberate concealment of his right by the defendant. If so, the idea was still-born. Lord Wright’s committee may well have had these cases in mind when it went out of its way in paragraph 23 of its report to say that they
“desire[d] to make it clear, however, that the mere fact that a plaintiff is ignorant of his rights is not to be a ground for the extension of time. Our recommendation only extends to cases when there is a right to relief from the consequences, of a mistake.”
This reservation was adopted by the draftsman of section 26 of the Limitation Act 1939 and the corresponding provision of the 1980 Act, both of which exclude from the ambit of paragraph (b) cases where the claimant was mistaken about the existence of his right. There are clearly obscurities about how the old rule in equity operated before statute intervened, attributable at least in part to the absence of analysis in the few reported cases. But there is, as it seems to me, no difficulty in ascertaining what rule the Law Revision Committee thought that it was proposing to Parliament.
Nor, in my view, is there any real difficulty in understanding what Parliament must have intended by accepting that proposal when it enacted section 26(c) of the 1939 Act. The point has been directly considered only once, by Pearson J in Phillips-Higgins v Harper [1954] 1 QB 411. That was an action by an assistant solicitor to enforce a term of her contract of employment which entitled her to a share of the profits of the firm for which she worked. She claimed to have been underpaid under the profits agreement for the whole 13 years of her employment. In response to a plea of limitation in respect of the early years, she contended that she had been mistaken in failing to realise that she was being underpaid, and relied on section 26(c) of the Limitation Act 1939. Pearson J rejected her argument. In his view the wording of the provision was “carefully chosen to indicate a class of actions where a mistake has been made which has had certain consequences, and the plaintiff seeks to be relieved from those consequences” (p 418). He gave as examples an action for the restitution of money paid in consequence of a mistake; or for the rescission or rectification of a contract on the grounds of mistake; or an action to reopen accounts settled in consequence of a mistake. Mrs. Phillips-Higgins’s alleged mistake had no consequences relevant to her cause of action. Its only consequence was that because she was unaware that she had a cause of action she missed the limitation period. “But that is not sufficient”, said Pearson J; “Probably provision (c) applies only where the mistake is an essential ingredient of the cause of action, so that the statement of claim sets out, or should set out the mistake and its consequences and pray for relief from those consequences” (p 419). It is fair to say about this reasoning that Mrs. Phillips-Higgins would have failed even on Mr Rabinowitz’s construction of the Act, because the mistake that she alleged was not the cause of the factual situation which she relied on for her claim. It only explained why she had allowed so long to pass before bringing her action. But what matters for present purposes is that her argument failed because her action was an action for relief from a breach of contract, to which the fact that she was mistaken was legally irrelevant. As Pearson J went on to point out, “No doubt it was intended to be a narrow provision, because any wider provision would have opened too wide a door of escape from the general principle of limitation.”
I think that it is difficult to fault Pearson J’s succinct and principled analysis of the point. Section 32(1)(c) refers to a type of action and a type of relief. They are assumed to be organically related to the relevant mistake. But if the Test Claimants are right, there is no organic connection, but only an adventitious one. The result would be a state of the law that would operate quite arbitrarily. Some Woolwich Equitable claims would benefit from the extended limitation period while others would not, depending on whether the underlying facts arose from a mistake. I can see no principled ground for making such a distinction in a context where the mistake has no bearing on the nature of the action or the relief claimed.
It has been suggested by academic commentators that this result may be anomalous, in that the extended period of limitation applies to a claim to recover a mistaken overpayment of a debt but not to a claim to recover a mistaken underpayment. Pearson J himself drew attention to this in his judgment in Phillips-Higgins at p 419. But for my part, I do not see the anomaly. The difference simply arises from the fact that if the claimant is underpaid and sues for the balance, he is enforcing the obligation that gave rise to the debt, whereas if he is overpaid then that obligation will have been discharged, so that he needs some other legal basis for getting it back. By comparison, there are far graver anomalies associated with the wider construction proposed by the Test Claimants. Once one departs from a construction of the subsection which requires the cause of action to be founded on the mistake, it is difficult to discern any principled limit to the reach of this provision. Mr Rabinovitz distinguishes between cases where the mistake, albeit legally irrelevant, was an effective cause of the facts giving rise to the claim and cases where it was merely a background fact. I find this distinction conceptually difficult to grasp and almost impossible to apply. Questions of causation are notoriously difficult and highly sensitive to the legal context in which they fall to be answered. Where parties have fallen out, there is very likely to be mistake on the part of the claimant somewhere in the chain of events that led to his losing money or property. If at some stage he could have done something to save himself from loss, in what circumstances is that to be a sufficient causal nexus between the legally irrelevant mistake and the legally relevant facts which give rise to the claim? The question will often be incapable of a clear answer. Moreover, if the test is not to depend on whether the claimant is asserting one of the established grounds of relief from the consequences of his mistake, and depends on the mere fact that a mistake has brought about the situation in which he has a claim, then there is nothing in the language or purpose of the provision which would limit it to his own mistakes. It could be the defendant’s mistake against whose consequences the plaintiff is seeking to be relieved, for example by an action for damages. This would mean that section 26(c) of the Limitation Act 1939 unwittingly covered at least part of the ground which Parliament later covered by providing an extended limitation period for actions for damages for negligence or in respect of personal injuries and certain categories of property damage: see sections 11 to 14B of the Limitation Act 1980. Mr Rabinowitz disclaimed any suggestion that the extended limitation period would apply to a claim for damages, with the possible exception of damages for misrepresentation or negligent mis-statement. This was no doubt tactically wise. But it is hard to see how such a restriction can be justified if his basic submission is accepted. The difficulties associated with the claimants’ construction of section 32(1)(c) persuade me that Lord Wright is unlikely to have proposed such an indefinite rule without any discussion of these problems, and that Parliament is unlikely to have intended to enact it. In an ideal world, all rules of law would be clear, but there are few areas where clarity is as important as it is in the law of limitation, whose whole object is to foreclose argument on what ought to be well-defined categories of ancient dispute.
Mistake
It follows that the principle in Woolwich Equitable applies generally in all cases where tax has been charged unlawfully, whether by the legislature or by the tax authorities, whether by overt threats or demands or simply by the taxpayer’s appreciation of the consequences of not paying, and whether the taxpayer was mistaken or not. By comparison, an action for restitution on the ground of mistake is a more limited remedy, for the obvious reason that it is necessary to prove the mistake. That will not always be easy, as the facts of Woolwich Equitable itself demonstrate. On the face of it, the only case where the Woolwich Equitable cause of action is probably not available and where a claimant may therefore need a right of restitution for mistake, is the case where there is no unlawful exaction of tax but the taxpayer has simply paid in error: e.g. he has miscalculated his liability under a self-assessed tax or accidentally paid twice. But that has no bearing on the position of the present claimants.
Does this mean that that the existence of the Woolwich Equitable cause of action in English law is enough to satisfy the obligations of the United Kingdom in EU law? The Test Claimants submit that it does not. Their case is that notwithstanding the sufficiency of a Woolwich Equitable claim as a means of recovering unlawfully charged tax, at least in the circumstances of the present case, EU law requires that English law should also maintain a fully effective cause of action to recover tax paid by mistake. Two quite different arguments are advanced in support of this proposition. The first is that EU law specifically requires that national legal systems should provide for the recovery of overpaid taxes in all cases where they were not due, including the one case where the principle in Woolwich Equitable probably has no application, viz where there is no breach of EU law by the state but the taxpayer has simply overpaid by mistake. I shall call this the “absence of basis point”. The second argument is that even if EU law does not specifically require national law to confer a right to recover taxes overpaid on the ground of mistake, if national law allows a choice between two causes of action to recover the tax, each of them must be independently effective. I shall call this the “choice of remedies point”.
The absence of basis point
The Test Claimants’ argument is that the obligation of a member state to provide an effective means of recovering overpaid taxes is not limited to cases where the state was in breach of EU law. It also applies in cases where the national law entirely conformed with EU law but the claimant paid more than the law required of him. This, they submitted, reflected the principle of restitution applied in EU law and in most civil law jurisdictions (but not England) that a payment is recoverable merely on account of the absence of a legal basis for making it: see Masdar (UK) Ltd v Commission of the European Communities (Case C-47/07) [2008] ECR I-9761, paras 44-46, 49.
In Reemtsma Cigarettenfabriken GmbH v Ministero delle Finanze …Case C-35/05) [2007] ECR I-2425 a German company purchased services from an Italian advertising agency and paid VAT to them which was not due. There was nothing wrong with the relevant provisions of Italian law for charging and collecting the tax, which in the relevant respects entirely conformed with the Directives. The Italian tax authorities had charged no tax unlawfully. All that happened was that the German purchaser received an invoice from the Italian supplier for the VAT and paid it, not appreciating that the relevant services were by law deemed to have been supplied in Germany. The supplier then accounted for the tax to the Italian tax administration. There was no provision of the two relevant VAT Directives requiring a refund to be made in these circumstances, but it was held that the principle of effectiveness required Italy to make available an effective means of recovering sums paid but not due, either from the Italian supplier or from the state. Mr Aaronson QC argued that the juridical basis for the obligation to repay overpaid tax in these circumstances was the mere absence of a legal basis for the original payment. I think that he may well be right about that. But the reason for the decision was that VAT is an EU tax whose incidence and administration is governed by mandatory requirements of EU law. The purpose of the VAT Directives is to produce a harmonized system operating according to uniform rules across the EU. The payment of VAT otherwise than in accordance with that scheme distorts its uniform operation. The point was made in Danfoss AS and Sauer-Danfoss ApS v Skatteministeriet (Case C-94/10), 20 October 2011, where a similar result was arrived at in the context of the common EU scheme for taxing mineral oils. In its judgment in that case, the court observed (para 23) that the purpose of a right of recovery in a harmonized tax scheme is not only compensatory but economic. “The right to the recovery of sums unduly paid helps to offset the consequences of the duty’s incompatibility with EU law by neutralising the economic burden which that duty has unduly imposed on the operator who, in the final analysis, has actually borne it.” In those circumstances, a right of action to recover money paid but not due is required so “that the economic burden of the duty unduly paid can be neutralised” (para 25).
If this issue were to arise in England in the context of an EU tax, the case would be classified in English law as one of mistake and recovery could probably be had on no other basis. But where the relevant tax is wholly a creature of national law, and no tax has been charged in breach of EU law, EU law is not engaged at all.
The choice of remedies point
This point is at the heart of the division of opinion within this court. The Test Claimants argue, and the majority agrees, that the principle of effectiveness in EU law requires that all remedies which are available to recover the tax should be independently effective for that purpose. Therefore, so the argument goes, it was not open to the United Kingdom to compromise the effectiveness of the right to recover on the ground of mistake by curtailing the limitation period for that right without a period of grace.
In argument, this point was founded mainly on the decision of the European Court of Justice in Rewe Handelsgesellschaft Nord mbH v Hauptzollamt Kiel (Case 158/80) [1982] 1 CMLR 449 (Rewe II). This was another case about VAT and excise duty chargeable under the terms of a Directive. It concerned not an unlawful charging of tax, but an unlawful exemption from tax. The claimants were companies operating supermarkets in German coastal towns, who were adversely affected by tax-free sales made in international waters during shopping cruises in the Baltic which began and ended in Germany. Under the terms of the Directives, a limited exemption was allowed for goods coming from member states in the personal luggage of travellers, but German law allowed an exemption of its own which was in some respects wider. The Court of Justice held that the exemption in the Directive was not available for sales made on shopping cruises beginning and ending in the same member state, that the tax ought to have been charged, that the incidence of VAT and excise duty was an occupied field governed exclusively by Community law, and that Germany had accordingly had no power to grant further exemptions of its own. The relevant question for present purposes concerned the remedies available to rival traders against the cruise operators. German law allowed a right of action to those adversely affected by breaches of national laws regulating economic activity. At para 40 of its judgment, the Court of Justice referred to this German right of action and then summarised the question at issue as follows:
“Placed in that context, the questions raised by the national court are intended in substance to establish whether that right of action may be exercised in similar conditions within the framework of the Community legal system in particular in the sense that if the economic interests of a person to whom Community law applies are adversely affected by the non-application of a Community provision to a third party, either through the action of a member state or of the Community authorities, that person may institute proceedings before the courts of a member state in order to compel the national authorities to apply the provisions in question or to refrain from infringing them.”
The court’s answer to that question appears at para 44 of the judgment:
“it must be remarked first of all that, although the Treaty has made it possible in a number of instances for private persons to bring a direct action, where appropriate, before the Court of Justice, it was not intended to create new remedies in the national courts to ensure the observance of Community law other than those already laid down by national law. On the other hand, the system of legal protection established by the Treaty, as set out in article 177 in particular, implies that it must be possible for every type of action provided for by national law to be available for the purpose of ensuring observance of Community provisions having direct effect, on the same conditions concerning the admissibility and procedure as would apply were it a question of ensuring observance of national law.”
In their printed case (paragraph 67) the Test Claimants rely on this statement of principle, and in particular the passage which I have italicised, as authority for the proposition that EU law requires a “right to choose from the range of national remedies.” Of course the Test Claimants do have a right to choose either or both of a Woolwich Equitable claim or a claim based on mistake. Neither of the Acts of 2004 and 2007 took it away from them. Their real complaint is not that the right to claim on the basis of mistake of law has been withdrawn, but that the law has been changed to make it subject to a period of limitation running from the date of payment in the same way as the limitation period for a Woolwich Equitable claim. The argument, as it was developed at the hearing, was that even on the footing that a Woolwich Equitable cause of action was enough and that the United Kingdom was not obliged to confer an additional right to recover tax paid by mistake subject to an extended limitation period, since it has chosen to do so, the principle of effectiveness requires that that right with its extended limitation period should remain available for the purpose of recovering tax charged contrary to EU law. This submission is accepted by the majority on the present appeal. I regret that I am unable to accept it for three reasons.
First, the argument is not supported by either the decision or the reasoning in Rewe II, nor by the many subsequent cases in which the relevant statement has been cited. Rewe II was concerned with the principle of equivalence, as the language and the legal context show. The issue was whether Germany was bound to make a right of action derived from economic regulation under its national law available to litigants who wanted to enforce comparable rights derived from economic regulation under Community law. What the court was saying was that any cause of action available to enforce a national law right must be equally available to enforce a corresponding Community law right. Provided that there remains an effective remedy, it does not follow from this that national law is bound to maintain that cause of action subject to unchanged incidents or conditions. Nothing was said in Rewe II about protecting the choice of litigants between concurrent national law rights or remedies. The question did not arise because the Court of Justice was considering the only German law remedy which appeared to exist.
Second, the Test Claimants’ submission is inconsistent with the established case law of the Court of Justice. In Edilizia Industriale Siderurgica Srl v Ministero delle Finanze (Case C-231/96) [1998] ECR I-4951 and Ministero delle Finanze v SPAC (Case C-260/96) [1998] ECR I-4997, para 32, the facts were that in breach of a Directive which prohibited taxes on the raising of capital, Italy had charged fees for registering companies. The general limitation period under the Civil Code was ten years, but the decree-law authorizing the registration fees provided (and always had provided) for their repayment within three years if they had been wrongly charged. The Italian courts had held that as a matter of domestic law, the effect of the creation of a specific right to repayment within three years under the decree-law was to displace the general right conferred by the Civil Code to claim restitution on the ground of absence of basis within ten years. One of the questions referred was whether Italy was bound to make available the cause of action with the more generous limitation period for the purpose of giving effect to EU law rights. The court held that it was not. Provided that the right of action carrying the more restrictive limitation period was effective and applied without discrimination whether the claim to repayment was based on EU or national law, there was no obligation to provide in addition a right of action under the Civil Code with a more generous limitation period. In Edilizia Industriale Siderurgica Srl v Ministero delle Finanze, the court said:
“36. Observance of the principle of equivalence implies, for its part, that the procedural rule at issue applies without distinction to actions alleging infringements of Community law and to those alleging infringements of national law, with respect to the same kind of charges or dues (see, to that effect, Amministrazione delle Finanze dello Stato v Salumi (Joined Cases 66/79, 127/79 and 128/79) [1980] ECR 1237, para 21. That principle cannot, however, be interpreted as obliging a member state to extend its most favourable rules governing recovery under national law to all actions for repayment of charges or dues levied in breach of Community law.
37. Thus, Community law does not preclude the legislation of a member state from laying down, alongside a limitation period applicable under the ordinary law to actions between private individuals for the recovery of sums paid but not due, special detailed rules, which are less favourable, governing claims and legal proceedings to challenge the imposition of charges and other levies. The position would be different only if those detailed rules applied solely to actions based on Community law for the repayment of such charges or levies.”
The same observations were made in Ministero delle Finanze v SPAC SpA, at paras 20 and 21. They were later repeated and applied in Aprile II and Dilexport, where the facts were very similar (see paras 151-152 above) but the question arose from a change in the law.
Third, the Test Claimants’ argument is contrary to principle. The starting point for any analysis of the law in this area is that, subject to the principles of effectiveness and equivalence, it is for national law to determine what remedies are available to enforce a directly effective EU right and on what procedural or other conditions. I have made this point already: see paragraph 145 above. The right of the claimants to choose from the range of causes of action recognised by English law is a right derived solely from English procedural law and it exists only to the extent that English law so provides. So long as the principles of effectiveness and equivalence are respected, a choice between concurrent national law remedies need not exist, and in some member states does not exist, at any rate to the same extent. Thus English law allows a claimant to choose between concurrent rights of action in contract and tort, a principle which was applied by analogy in Deutsche Morgan Grenfell [2007] 1 AC 558 to allow a choice between concurrent rights to recover under the Woolwich Equitable principle and on the ground of mistake. French law, by comparison, is more prescriptive. The principle of non-cumul des responsabilités, which excludes delictual claims which fall naturally within the scope of a contract is generally thought to reflect a more general juristic preference for keeping legal categories distinct and allowing claims to be brought in the category to which their subject matter is appropriate. The same approach appears to lie behind the restriction of claims under the general doctrine of unjust enrichment (enrichissmement sans cause légitime) to cases where no other action is available: Flour, Aubert et Savaux, Droit civil, Les obligations, 2 Le fait juridique, 11th ed. (2011), 57-64. I can see no principled reason why EU law should wish to control these divergent features of national legal systems, provided that the choice which the relevant law mandates and the conditions on which it does so are non-discriminatory and effective to vindicate EU rights.
The protection of legitimate expectations: Finance Act 2004, section 320
I have already analysed the case law of the Court of Justice on the retrospective curtailment of limitation periods for the exercise of directly effective EU law rights. It establishes, first, that the retrospective curtailment of a limitation period is not necessarily inconsistent with the principle of effectiveness; and, secondly, that the combined effect of the principle of effectiveness and the principle of the protection of legitimate expectations is to preclude national legislatures from retrospectively curtailing the limitation period applicable to the recovery of overcharged tax, unless there is a sufficient period of grace to enable actual and potential claimants to safeguard their existing rights. However, it is important to note that in every case in which these principles have been considered by the Court of Justice, the amending legislation curtailed the limitation period for the only right available in national law for recovering the tax. In none of them was there an effective right of recovery on another legal basis, unaffected by the amendment. The observations of the Advocate-General and the court, especially those made in Marks & Spencer must be read in that light.
The primary case put forward on behalf of the Commissioners is that because (i) English law would be compatible with EU law if the only means of recovering the overpaid tax was a claim on a Woolwich Equitable basis, and (ii) the Finance Act 2004 did not affect a claim on that basis, it follows that the principles of effectiveness and the protection of legitimate expectations are not engaged at all. In common with every other member of the court, I reject that submission. The reason is that if, as I have sought to demonstrate (i) a right to claim on the principle in Woolwich Equitable with a normal limitation period is an effective means of asserting the Test Claimants’ EU law right, and (ii) there is no obligation on the United Kingdom in EU law to maintain a concurrent right to claim on the basis of mistake with an extended limitation period, then logically there still remains one complaint that might arguably be made about section 320 of the Finance Act 2004. That complaint is that before the intention to legislate was announced potential claimants were entitled to make their plans on the assumption that they could recover the overpaid tax on the ground of mistake with the benefit of an extended limitation period, but their right to do so was then curtailed without notice or transitional provisions. I think that this complaint depends on the principle of the protection of legitimate expectations, whereas Lord Walker and Lord Reed consider that it can be justified on the basis of the principle of effectiveness alone. I doubt whether this difference matters. In either case, the force of the complaint depends entirely on the proposition that reasonable persons in their position could have made their plans on that assumption.
Could they? I think not. If English law had never recognised a right to recover tax on the ground of mistake of law, but only on the basis of the principle in Woolwich Equitable, it is not disputed that that state of affairs would have satisfied the requirements of EU law. If Parliament had retrospectively created a concurrent right to recover tax on the ground of mistake of law, but in the same enactment made it subject it to a limitation period of six years to run from the time of payment, it is not disputed that that state of affairs would also have satisfied the requirements of EU law. The question whether the right to recover money paid under a mistake of law extended to mistaken payments of tax was a difficult question. There were powerful voices raised in favour, such as that of Professor Birks, but also strong and principled arguments against. I have dealt with this matter at paragraphs 166-168 above. Before Park J gave judgment in Deutsche Morgan Grenfell [2003] 4 All ER 645 on 18 July 2003, no one could reasonably have counted on being able to recover tax on the ground of mistake of law. They might have thought that there were strong arguments to that effect, but I do not believe that they could reasonably have assumed when deciding how long they had in which to bring their claims that those arguments would prevail. Even after Park J’s judgment, the right to recover tax on the ground of mistake of law was being challenged on appeal on serious grounds. The existence of such a right was rejected by the Court of Appeal [2006] Ch 243 and was not definitively established until the judgment of the House of Lords [2007] 1 AC 558 on 25 October 2006.
In a common law system, it is open to the courts to create new causes of action, but limitation is necessarily a matter for the legislature. On 8 September 2003, just seven weeks after the decision of Park J, the government announced its intention to introduce what became section 320 of the Finance Act 2004, with its provision that the limitation period for the newly recognised claim to recover tax on the ground of mistake of law should run from the date of payment and not from the date of discovery. I find it impossible to regard that sequence of events as any different in substance from the situation that would have existed if Parliament had simultaneously created a right to recover tax for mistake of law and subjected it to a limitation period running from the date of payment. If potential claimants in the position of the present appellants claim to have been entitled to count on being able to recover on the ground of mistake of law with an extended limitation period, then the highest that they can put their case is that they were entitled to do so in the seven week interval between 18 July and 8 September 2003. Bearing in mind the brevity of the interval, the virtual certainty of an appeal and the uncertainty about its outcome, the argument that they had a legitimate expectation of the kind suggested seems to me to be unrealistic. In my judgment, section 320 of the Finance Act 2004 was not inconsistent with the protection of legitimate expectations. All that Parliament did was to provide for the limitation period applicable to a cause of action which English law had only just recognised. This was a lawful exercise by Parliament of the discretion allowed to member states as to the conditions regarding limitation on which any national law right is be available.
The contrary view of the majority depends on the declaratory theory of judgments. It proceeds upon the basis that when Park J and then the House of Lords held in Deutsche Morgan Grenfell that there was a right to recover tax on the basis of mistake, they were declaring the law as it had always been. At a purely formal level, this proposition is undoubtedly correct. Judgments of the courts about the common law are deemed to be declaratory and not legislative. But we are, I think, in danger of allowing the form to overlay the substance. In Deutsche Morgan Grenfell, at p 570, Lord Hoffmann distinguished between two questions raised by the declaratory theory of judgments:
“One is whether judges change the law or merely declare what it has always been. The answer to this question is clear enough. To say that they never change the law is a fiction and to base any practical decision upon such a fiction would indeed be abstract juridical correctitude. But the other question is whether a judicial decision changes the law retrospectively and here the answer is equally clear. It does. It has the immediate practical consequence that the unsuccessful party loses, notwithstanding that, in the nature of things, the relevant events occurred before the court had changed the law: see In re Spectrum Plus Ltd [2005] 2 AC 680. There is nothing abstract about this rule.”
In my judgment, it is the first of Lord Hoffmann’s propositions which is relevant for present purposes. The question is not whether the law must be treated as always having been as Park J and the House of Lords declared it to be. It is whether before those judgments were delivered a litigant could reasonably count on being able to recover the overpaid tax on the ground of mistake (with an extended period of limitation), as opposed to being limited to the already established remedy under the Woolwich Equitable principle (with a normal period of limitation). The question must in my judgment be put in this way, because the issue is whether there is an assumption reasonably to be imputed to litigants about how long they had in which to bring their claim, which was then retrospectively falsified by Parliament. The answer to the question cannot depend on any legal fiction. It must depend on the position as it appeared to stand, before those judgments were given. This must in particular be true when one is seeking to apply to the relevant English law principles of EU law which have always depended on substance rather than form. The reality is that the Test Claimants never were in a position to make their plans on the footing that they had a right of action for mistake until at the very earliest the judgment of Park J, but more realistically until the matter was definitively settled by the House of Lords in 2006.
It is right to point out that this is substantially the same principle as that on which the Test Claimants themselves rely when they say (with the support of the House of Lords in Deutsche Morgan Grenfell) that they cannot be taken to have discovered their mistake about the lawfulness of the United Kingdom’s corporation tax regime until the European Court of Justice definitively decided the point. By the same token, the Test Claimants cannot be taken to have assumed that they had a right to recover the tax on the ground of mistake at a stage when they had arguments and hopes but no definitive decision.
The protection of legitimate expectations: Finance Act 2007, section 107
As I have already indicated, I regard this provision as more problematic. It was announced on 6 December 2006, more than three years after the announcement which preceded section 320 of the Act of 2004. It went a great deal further than the earlier enactment, since it applied retrospectively without limit of time to any action brought before the first announcement had been made on 8 September 2003. It might be said that the announcement of 2006 was a response to the decision of the House of Lords in Deutsche Morgan Grenfell and that the interval between judgment and announcement was no greater than it had been in 2003. But the circumstances were different. Companies in the position of the British American Tobacco group who had already brought their actions before the announcement of 8 September 2003 had been expressly excluded from the operation of the legislation proposed on that date. That exclusion was duly contained in section 320 of the Finance Act 2004. The British American Tobacco group and other companies in the same position had been pursuing their claims through the English courts and the Court of Justice on that basis since 2003, when their right to the fruits of those proceedings was removed in 2006. In my view, while they had had no legitimate expectation of being able to bring an action to recover on the ground of mistake of law in 2003, they had acquired such an expectation by 2006, not least as a result of the terms of the announcement of September 2003 and the 2004 Act. It was therefore contrary to the principle of the protection of legitimate expectations, for that expectation to be defeated without notice of transitional provisions.
Section 33 of the Taxes Management Act 1970
This provision applies only to assessed taxes, and therefore only to a very small part of the present claims. It confers a right subject to highly restrictive conditions to invoke what is essentially a discretionary power of the Commissioners to grant a refund of overpaid tax. No one suggests on this appeal that such a limited remedy could possibly be enough in itself to satisfy the virtually unqualified obligation of the United Kingdom to provide an effective means of recovering tax overcharged contrary to EU law. This does not of course matter if it is an additional remedy as opposed to an exclusive one. There is certainly nothing in the provision which expressly excludes the availability of other causes of action at common law. If that is its effect, it must be by implication. In the ordinary way, such an exclusion might be implied, on the ground that where Parliament confers a restricted right of recovery, that must impliedly displace a corresponding right at common law which would be unrestricted. However, it is axiomatic that the courts cannot imply an exclusion of unrestricted rights of action at common law where that would be inconsistent with an overriding rule of EU law that an unrestricted right must be available. Section 33 cannot therefore be an exclusive right to recover tax overcharged contrary to EU law. Whether it is an exclusive right in other circumstances, is not a point which needs to be considered on this appeal.
The Court of Appeal held that section 33 did impliedly exclude a right of action at common law, even in relation to claims for tax overcharged contrary to EU law. They then dealt with the resulting inconsistency with EU law by reinterpreting the section so as remove the offending restrictions and the element of discretion. I think that this was wrong in principle. I very much doubt whether such radical surgery can be justified even under the extended principles of construction authorised in Marleasing. Its effect would be fundamentally to alter the scheme of the provision. But, however that may be, it seems, with respect, eccentric to imply an ambit for section 33 which is inconsistent with EU law and then to torture the express provisions so as to deal with anomalies that but for the implication would never have arisen.
The damages claims
In addition to their claims in restitution, the claimants have claims against the Commissioners in damages on the principle of state liability adopted by the European Court of Justice in Francovich v Italian Republic (Cases C-6 and 9/90) [1995] ICR 722. This cause of action is subject to a number of conditions, one of which is that the breach should be sufficiently serious, ie should involve a “grave and manifest” disregard of the limits of the member state’s discretion: see Joined Cases C-46/93 and C-48/93 Brasserie du Pecheur SA v Federal Republic iof Germany (Joined Cases C-46/93 and C-48/93) [1996] QB 404. Both courts below have dismissed the claim for damages on the ground that that condition is not satisfied. That may explain why, although the issues before us were formulated so as to cover their implications for the damages claim also, the argument focused exclusively on the claim for restitution. In fact, the damages claims do not call for separate consideration because neither section 320 of the Finance Act 2004 nor section 107 of the Finance Act 2007 applied to those claims unless they fall within section 32(1)(c) of the Limitation Act 1980. It follows from the construction that I would give to that provision that they do not fall within it. It is not suggested that section 33 of the Taxes Management Act 1970 has any bearing on a claim for damages on the principle of state liability.
Conclusion
In the result, I would
(1) affirm the decision of the Court of Appeal on the requirements of the cause of action based on Woolwich Equitable and the absence of any requirement for an additional remedy in mistake (Issue 12 in their numbering);
(2) affirm their decision on the effect of section 32(1)(c) of the Limitation Act 1980) (Issue 22);
(3) allow the appeal on section 107 of the Finance Act 2007 (Issues 20 and 21); and
(4) allow the appeal on section 33 of the Taxes Management Act 1970 (Issue 23).
The question whether section 320 of the Finance Act 2004 is compatible with EU law cannot be decided without a reference to the Court of Justice. It is plain from the novelty of the circumstances in which it arises, and from the differences of opinion within the court that it is not acte clair. I would, however, limit the reference to section 320 of the 2004 Act.
LORD REED
Lord Walker and Lord Sumption have expressed different views about the way in which EU law applies to the grounds of action available to the test claimants for the recovery of taxes which were levied contrary to EU law, and in particular about the way in which EU law applies to legislation which shortened, retroactively and without transitional provisions, the limitation period applicable to one of those grounds of action. In my opinion, Lord Walker’s analysis of the compatibility of section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007 with the principle of effectiveness, and of the compatibility of the latter provision with the principle of the protection of legitimate expectations, is consistent with the relevant case law of the Court of Justice of the European Union. I agree with his reasoning and conclusions in relation to those issues, as well as in relation to the issues of domestic law before the court. For my part, in agreement with Lord Hope and Lord Clarke, I am inclined to the view that section 320 of the 2004 Act also infringes the principle of the protection of legitimate expectations. I add some observations of my own in relation to the issues of EU law only because of the importance of those issues and the division of opinion in the court. It is perhaps unusual to discuss EU law in such detail when the matter is to be referred to the Court of Justice, but in the present case the issues of EU law and domestic law are closely inter-related.
The difficulties in this case arise partly from the fact that the relevant principles of English law have been in the course of development during much of the relevant period of time. The principal milestones along the road are three decisions of the House of Lords. First, in 1992 the House of Lords held that a taxpayer was entitled to recover taxes paid in response to an unlawful demand: Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70. Secondly, in 1998 the House of Lords held that money paid under a mistake of law was recoverable: Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349. Thirdly, in 2006 the House of Lords held that the latter principle applied to taxes paid under a mistake of law, including taxes paid in ignorance of the fact that the legislation under which they were levied was incompatible with EU law: Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs [2007] 1 AC 558 (“DMG”). Two other important matters were also decided in that case. The first concerned the limitation period applicable to the claim. In terms of section 32(1)(c) of the Limitation Act 1980, that period would not begin to run until the mistake was discovered, or could with reasonable diligence have been discovered. The House of Lords held that, in the circumstances of the case, the mistake could not be discovered until the incompatibility of the tax with EU law had been established by a judgment of the Court of Justice. The second matter was that the fact that the taxpayer might have a concurrent ground of action under the Woolwich principle, which was subject to a limitation period running from the date of the payment, did not prevent it from pursuing its claim on the ground of mistake if the extended limitation period best suited its interests. Finally, in its present decision this court has held that a taxpayer who pays taxes in compliance with legislation which is incompatible with EU law has a ground of action under the Woolwich principle, in addition to any ground of action which may be available on the basis of mistake.
The legislative provisions with which we are now concerned alter the limitation period applicable to claims for the repayment of taxes on the ground of mistake, so that it runs from the date when the payment was made, rather than the date when the mistake was discovered or could reasonably have been discovered. The first provision with which we are concerned, section 320 of the Finance Act 2004, applies to claims which were made on or after 8 September 2003. The second provision, section 107 of the Finance Act 2007, applies to claims made before that date. The claims with which we are concerned were made on 18 June 2003, in the case of the BAT group claimants, and on 8 September 2003, in the case of the Aegis group claimants. They were based on both grounds of action. The principal issue we have to determine is whether the application of the legislation to the claims is compatible with EU law.
In considering that issue, there appear to me to be three central questions, which can at this stage be broadly stated as follows. The first is whether the ground of action enabling taxes levied in breach of EU law to be recovered on the basis of mistake falls within the ambit of the EU principle of effectiveness. It is argued that it does not, since the ground of action based on an unlawful demand in itself fully satisfies the requirement of EU law that there should be an effective remedy. Since no additional remedy is required by the principle of effectiveness, it follows, so the argument runs, that the additional ground of action which English law provides, based on mistake, falls outside the scope of that principle. I disagree. As I shall explain, it appears to me that the EU principle of equivalence, which is the complement of the principle of effectiveness, applies to the grounds of action available for the recovery of taxes in domestic law. Where an action for the recovery of taxes under domestic law can be based either on the ground of mistake or on the ground of unlawful demand (or, as in the present case, on both grounds), it follows from the principle of equivalence that both grounds of action should also be available in similar circumstances to enforce an analogous right under EU law. So long as they must both be available, they must also both be effective. The principle of effectiveness therefore applies to both grounds of action.
The second question, which arises only if the first question is answered in the affirmative, is whether the application of section 320 of the 2004 Act to the Aegis claims, and of section 107 of the 2007 Act to the BAT claims, is compatible with the principle of effectiveness. As I shall explain, I consider that it is not compatible in either case, since the retroactive curtailment of the limitation period and the absence of any transitional provisions rendered impossible in practice the exercise of rights derived from EU law. If that is correct, it follows that the legislation cannot be relied upon against the claimants, whatever the answer to the third question may be.
The third question is whether the application of the legislation to these claims is compatible with the EU principle of the protection of legitimate expectations. That is a question which arises even if the first question is answered in the negative, since the procedural rules laid down by domestic law for the enforcement of rights derived from EU law must be in conformity with the general principles of EU law, including the general principle requiring the protection of legitimate expectations. The answer to the third question is however of no practical significance if the first two questions are answered as I would answer them. In the event, we are all agreed that the application of section 107 of the 2007 Act to the BAT claims is incompatible with the protection of the BAT claimants’ legitimate expectations. In agreement with Lord Hope and Lord Clarke, I have also reached the same provisional conclusion in respect of the application of section 320 of the 2004 Act to the Aegis claims, for reasons which I shall explain.
It might be argued that a fourth question also arises on the facts of these cases: namely, whether the application of the legislation in issue to these claims would be compatible with the rights recognised in the Charter of Fundamental Rights of the European Union (OJ 2000 C 364, p 1) (notably in article 47), to which effect is given by article 6(1) of the Treaty on European Union (“TEU”), or with the fundamental rights recognised by article 6(3) TEU, including in particular the right of access to a court, guaranteed by article 6(1) of the European Convention for the Protection of Human Rights and Fundamental Freedoms, and the right to the peaceful enjoyment of possessions, guaranteed by Article 1 of the First Protocol to the Convention. That question however goes beyond the ambit of the dispute as defined by the parties, and it raises issues on which the court has not been addressed. In those circumstances it would not be appropriate for the court to consider that question of its own motion. My answers to the first three questions in any event produce a result which is not incompatible with the fundamental rights just mentioned.
I turn now to consider in greater detail the three questions which I have identified.
The mistake ground of action and the principles of equivalence and effectiveness
Under the principle of cooperation laid down in article 4(3) TEU, it is for the member states to ensure the effective judicial protection of an individual’s rights under EU law: see, for example, Unibet (London) Ltd v Justitiekanslern (Case C-432/05) [2008] All ER (EC) 453, paras 37-44. In particular, in the absence of EU rules governing the matter, it is for the domestic legal system of each member state to lay down the procedural rules governing actions for safeguarding rights which individuals derive from EU law. In a case such as the present, it may seem idiosyncratic to describe the grounds of action available under domestic law as procedural rules, but that description reflects the distinction drawn in the case law of the Court of Justice between the right derived from EU law and the national law by means of which effect is given to that right, which may govern such matters as the procedure to be followed, the period within which claims must be made, and the proof of such claims.
That general approach applies to the right to recover the taxes in issue in the present case, to the extent that they were levied in breach of EU law: see the judgment of the Grand Chamber on the first reference in these proceedings, Test Claimants in the FII Group Litigation v Inland Revenue Comrs (Case C-446/04) [2006] ECR I-11814, para 203. As the Grand Chamber stated, the procedural rules laid down by domestic law must comply with two conditions. First, they must not be less favourable than those governing similar domestic actions. That is the principle of equivalence. Secondly, they must not render virtually impossible or excessively difficult the exercise of rights conferred by EU law. That is the principle of effectiveness. Equivalence and effectiveness are complementary requirements.
For the purpose of applying the principle of equivalence, a claim for the recovery of taxes levied by a member state in breach of EU law is similar to a claim for the restitution of taxes unlawfully levied under domestic law. In England and Wales, the rules laid down by domestic law governing such claims are in large part rules of common law. The procedure laid down by section 33 of the Taxes Management Act 1970 is an exception. For the reasons given by Lord Walker and Lord Sumption, however, that statutory procedure is not applicable in the circumstances of this case. The relevant rules of common law include those laid down by the House of Lords in the three cases which I have mentioned – Woolwich, Kleinwort Benson and DMG – and by this court in the present case. In particular, as I have explained, it was held in the DMG case that a person who had mistakenly paid taxes which had been levied in breach of EU law had a ground of action based upon the fact that the payment had been made under a mistake: that is to say, the ground of action whose general nature was established in Kleinwort Benson. The present decision holds that such a person also has a ground of action based upon the fact that the payment was made in compliance with legislation which was incompatible with EU law: that is to say, the ground of action whose general nature was established in Woolwich. The two grounds of action are in some respects subject to different rules, and in consequence one or the other may be more suitable to a claimant, depending upon the circumstances. For example, apart from the legislation in issue in the present case, the two grounds of action are subject to different limitation periods. There may be other differences. In the present case, as I have explained, the claims are based upon both the mistake ground of action and the unlawful demand ground of action.
Where both these grounds of action are available for the recovery of taxes which have been levied in breach of domestic law, and a person seeking to recover such taxes can choose to base his claim upon whichever ground of action best suits his interests, it follows from the principle of equivalence that the same grounds of action, and the same freedom of choice, must equally be available in analogous circumstances to a person seeking to recover taxes which have been levied in breach of EU law: otherwise, claims based on EU law would be less favourably treated than similar claims based on domestic law. As the Court of Justice stated in Rewe-Handelsgesellschaft Nord mbH v Hauptzollamt Kiel (Case 158/80) [1981] ECR 1805, para 44, the system of legal protection established by the Treaties implies that “it must be possible for every type of action provided for by national law to be available for the purpose of ensuring observance of Community provisions having direct effect” (emphasis added).
It might however be argued that a complication arises from the fact that it had not been definitively decided at the time when the claims were made, or at the time when the legislation was enacted, that those grounds of action were available for the bringing of claims such as those with which the present proceedings are concerned. Does that make a difference to the way in which the principle of equivalence applies? In my view it does not. The decision of the House of Lords in DMG, confirming the soundness of a claim to the repayment of unlawfully levied tax on the basis of a mistake in law, was in no sense prospective only. The decision of this court in the present case, confirming that claims to the repayment of unlawfully levied tax can be made on the basis of the Woolwich principle even in the absence of a formal demand, has similarly determined what the law was at the time when the claims were made. Although each of those decisions determined a question of law which was previously contestable, and can therefore be said to have involved a development of the law, they cannot be equiparated to legislation: such decisions actually, and not merely formally, declare the law that is applicable to the case before the court and all other comparable cases. As Lord Goff of Chieveley explained in DMG at pp 378-379, the declaratory theory of judicial decision is not an aberration of the common law, but reflects the nature of judicial decision-making (an aspect which is also reflected in the temporal effects of the judgment of the Grand Chamber on the first reference in these proceedings). It follows that these claims, although made in proceedings which commenced prior to the decisions of the House of Lords in DMG and of this court in the present case, are based on grounds of action which were available under English law at the time when the claims were made, as a means of recovering taxes which had been unlawfully levied, even if that could not have been known with certainty until the matter had been finally determined by the highest courts.
It accordingly appears to me that the grounds of action based on mistake and on an unlawful demand were both available at all material times, in the circumstances laid down in the relevant case law, for the recovery of taxes which had been levied contrary to domestic law. It follows from the principle of equivalence that both grounds of action must also have been available in analogous circumstances for the recovery of taxes levied contrary to EU law. That is not, of course, to say that English law was bound to maintain both grounds of action subject to unchanged incidents or conditions; but any changes would have to comply with the requirements of EU law, including the requirement of effective judicial protection.
That conclusion is challenged on the basis that the mistake ground of action is neither necessary nor sufficient to meet the requirements of EU law, as laid down in such cases as Amministrazione delle Finanze dello Stato v SpA San Giorgio (Case 199/82) [1983] ECR 3595: it is not necessary, since the unlawful demand ground of action is in itself adequate; and it is not sufficient, since it requires the presence of an additional element besides the levying of the taxes in breach of EU law, namely that they must have been paid under a mistake as to the lawfulness of the domestic legislation.
The first of these contentions appears to me to be off the point. The fact that the ground of action based on an unlawful demand satisfies the San Giorgio principle does not exclude the possibility that the ground of action based on mistake also satisfies that principle. Indeed, the ground of action based on mistake is of considerable practical importance as a means of enforcing rights to repayment derived from EU law, as the present case demonstrates, since it enables claims relating to taxes levied in breach of EU law to be brought outside the six year limitation period, reckoned from the date of the payment, which applies to claims based upon the Woolwich principle: a period which may have expired before the mistake as to the validity of the tax legislation is discovered. Admittedly, if English law had evolved differently, and the ground of action based on mistake had not been available, then the ground of action based on an unlawful demand might well have met the requirements of EU law. The fact of the matter, however, is that English law provides two grounds of action which are capable of satisfying the San Giorgio principle, and the principle of equivalence therefore requires that both grounds of action should be available for the enforcement of rights derived from EU law.
The second contention also appears to me to be mistaken. The two grounds of action are not identical: in particular, subject to the legislation at issue in the present case, they are subject to different limitation periods. The mistake ground of action admittedly includes an additional element, namely that the taxes were paid under a mistake; but it is the presence of that additional element which enables the claimant to benefit from an extended limitation period which begins when the mistake is discovered or could with reasonable diligence have been discovered, rather than beginning when the payment was made. The mistake ground of action is therefore a valuable remedy for the recovery of taxes levied contrary to EU law. If it were not available for that purpose, then the person who had paid taxes levied contrary to EU law would be in a less favourable position than the person who had a similar claim under domestic law.
The principle of equivalence does not of course oblige a member state to extend its most favourable rules governing recovery under national law to all actions for repayment of charges or dues levied contrary to EU law (Edilizia Industriale Siderurgica Srl v Ministero delle Finanze (Case C-231/96) [1998] ECR I-4951, para 36 (“Edis”)). It was therefore open to the United Kingdom to curtail the limitation period applicable to the ground of action based on mistake without offending against the principle of equivalence, so long as it did so not only for claims based on a breach of EU law but also for similar claims based on a breach of domestic law. That had not however been done by the time the present actions were commenced. Whether the retroactive manner in which the limitation period was subsequently curtailed was compatible with EU law raises issues not in relation to the principle of equivalence but in relation to the principle of effectiveness.
If, then, the principle of equivalence required that the mistake ground of action should be available to the claimants at the time when they made their claims, then it follows under EU law that the principle of effectiveness also applied to that ground of action, and continues to apply until the claims are determined. The question which arises, and to which I turn next, is whether the application of section 320 of the 2004 Act to the Aegis claims, and of section 107 of the 2007 Act to the BAT claims, would be compatible with that principle.
The application of the principle of effectiveness
The principle of effectiveness requires that the national procedural rules required by the principle of equivalence must provide effective judicial protection in conformity with EU law. Taken in conjunction with the principle of equivalence, it is a principle which has far-reaching implications for domestic law.
The principle of effectiveness may in particular impinge upon domestic laws relating to limitation periods. There is of course no objection in principle to limitation periods under EU law: on the contrary, it is recognised that reasonable periods of limitation are necessary in the interests of legal certainty (Rewe-Zentralfinanz eG v Landwirtschaftskammer für das Saarland (Case 33/76) [1976] ECR 1989, para 5 and Comet BV v Produktschap voor Siergewassen (Case 45/76) [1976] ECR 2043, paras 17-18). Equally, there is no requirement that rights derived from EU law should be subject to the most favourable limitation period available under domestic law, provided the principle of equivalence is respected (Edis).
National legislation curtailing the period within which recovery may be sought of sums which have been levied in breach of EU law is not in principle incompatible with EU law. The Court of Justice has however laid down certain requirements with which such legislation must comply. It must for example not be intended specifically to limit the consequences of a judgment of the Court of Justice (see eg Deville v Administration des Impôts (Case 240/87) [1988] ECR 3513). In that regard, I note that the Government announced its intention to introduce the provision which became section 107 of the Finance Act 2007 on 6 December 2006, which was the day on which the Court of Justice had rejected the Government’s application to re-open the hearing in the first reference in this case so as to allow it to seek a temporal restriction to the effect of the judgment. The effect of section 107 is not however confined to the taxes with which the court’s judgment was concerned, and it is not contended that the provision offended against the Deville requirement. In the circumstances, I proceed on that basis.
A further requirement of legislation curtailing a limitation period is that the arrangements for its entry into force must be consistent with effective judicial protection of the rights derived from EU law. In particular, such legislation must ensure that it remains possible in practice to enforce the right to repayment derived from EU law. In order to understand how that principle applies in the present case, it is helpful to consider some of the judgments of the Court of Justice.
First, Aprile v Amministrazione delle Finanze dello Stato (No 2) (Case C-228/96) [2000] 1 WLR 126 concerned a claim for repayment of charges wrongfully levied in 1990, when such claims were subject to the general limitation period of ten years. On 27 January 1991 legislation was enacted which brought such claims within the scope of a shorter limitation period prescribed by customs legislation, which was then a period of five years, and in addition reduced that limitation period to three years as from 27 April 1991. The action was begun on 30 March 1994. It was accepted by the national authorities that the legislation could not be applied to claims which had been lodged prior to 27 April 1991. In that regard, the Advocate General observed at para 41 of his opinion that the legislation would be clearly incompatible with Community law if it applied to claims which had been lodged before that date: the Community principle of legal certainty did not allow such claims to be affected by a later provision not existing at the time of lodgement which detracted from the legal situation of the claimants. The issue concerned claims lodged after 27 April 1991 in respect of payments which had been made at a time when the longer limitation period applied. As the Court of Justice noted, the national courts interpreted the legislation as not having any retroactive effect: it was construed as meaning that persons whose claims had arisen before the date when the legislation came into force had three years from that date within which to commence proceedings: a period which was sufficient to guarantee the effectiveness of the right to reimbursement (para 28). On that basis, the legislation was compatible with Community law. The same conclusion was also reached, on similar facts, in Dilexport Srl v Amministrazione delle Finanze dello Stato (Case C-343/96) [2000] All ER (EC) 600.
Secondly, Marks & Spencer plc v Customs and Excise Comrs (Case C-62/00) [2003] QB 866 concerned a claim for repayment of VAT unduly paid between May 1991 and August 1996, when the relevant limitation period was six years. On 19 March 1997 legislation was enacted which reduced the limitation period to three years. The legislation was deemed to have come into force on 18 July 1996. The action was begun on 15 April 1997. The Court of Justice considered the legislation both in relation to the principle of effectiveness and in relation to the principle of the protection of legitimate expectations. I shall consider the second of those aspects below. In relation to the principle of effectiveness, the court derived from its judgments in Aprile and Dilexport the proposition that, in order for national legislation curtailing the period within which recovery may be sought of sums charged in breach of Community law to be compatible with Community law, “the time set for its application must be sufficient to ensure that the right to repayment is effective” (para 36). The Court continued:
“37. It is plain, however, that that condition is not satisfied by national legislation such as that at issue in the main proceedings which reduces from six to three years the period within which repayment may be sought of VAT wrongly paid, by providing that the new time limit is to apply immediately to all claims made after the date of enactment of that legislation and to claims made between that date and an earlier date, being that of the entry into force of the legislation, as well as to claims for repayment made before the date of entry into force which are still pending on that date.
38. Whilst national legislation reducing the period within which repayment of sums collected in breach of Community law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right.
39. In that connection it should be noted that member states are required as a matter of principle to repay taxes collected in breach of Community law (Société Comateb v Directeur Général des Douanes et Droits Indirects (Joined Cases C-192 to 218/95) [1997] ECR I-165, para 20, and Dilexport [1999] ECR I-579, 610-611, para 23), and whilst the court has acknowledged that, by way of exception to that principle, fixing a reasonable period for claiming repayment is compatible with Community law, that is in the interests of legal certainty, as was noted in paragraph 35 hereof. However, in order to serve their purpose of ensuring legal certainty limitation periods must be fixed in advance (ACF Chemiefarma v Commission of the European Communities (Case 41/69) [1970] ECR 661, para 19).”
As the court made clear at para 38, the legislation in issue in Marks & Spencer was objectionable not only because it applied retroactively to persons who had already made claims for repayment which were within the limitation period then in force, but also because it precluded claims by persons who could otherwise have made claims within that period, without any transitional provisions to protect the rights of such persons. A similar conclusion was also reached in Grundig Italiana SpA v Ministero delle Finanze (Case C-255/00) [2003] All ER (EC) 176, where a limitation period of five years was replaced by one of three years, and a transitional period of 90 days was held to be insufficient to ensure that the right of recovery was not rendered excessively difficult.
It follows from cases such as Aprile, Dilexport, Marks & Spencer and Grundig that a taxpayer who has paid taxes levied contrary to EU law is not vested with a right to repayment in accordance with the domestic provisions which were in force at the time when the payment was made. It is permissible to alter the applicable rules of domestic law, including rules as to limitation, provided the legislation effecting the alteration does not in practice deprive the persons affected of their right to seek reimbursement. In order for that proviso to be met, however, the legislation must not apply the new limitation period retroactively so as to bar claims which were made timeously according to the law then in force, and the arrangements for its entry into force must also allow persons who have not yet made claims an adequate period of time to ensure that their right to repayment remains effective.
In the present case, the claims are for the repayment of taxes unduly paid between 1973 and 1999, when the relevant limitation period was six years. That period generally ran from the date of the payment, but in an action for relief from the consequences of a mistake the period was extended: it did not begin to run until the claimant discovered the mistake or could with reasonable diligence have discovered it (section 32(1)(c) of the Limitation Act 1980, re-enacting a provision previously contained in section 12 of the Limitation Act 1939). As Lord Walker has explained at paras 103-104, it has been established in this case that the payments were made under a mistake about the lawfulness of the tax regimes under which they were paid; and it was only after the Court of Justice issued its judgment in Metallgesellschaft Ltd v Inland Revenue Comrs (Joined Cases C-397/98 and C-410/98) [2001] Ch 620 that it was generally appreciated that the UK corporation tax regime was open to challenge as infringing Community law. A well-advised company in the position of the claimants would then have had grounds for considering that it was entitled to the repayment of tax which had been levied contrary to Community law, and that there was at least a reasonable prospect that it could rely upon the extended limitation period provided by section 32(1)(c) of the 1980 Act in order to recover any taxes paid more than six years before the proceedings were begun. In order to do so, it would of course have to base its claim upon the mistake ground of action. The BAT action was begun in June 2003, and the Aegis action on 8 September 2003. In each action, the claim was based upon the mistake ground of action (as well as the unlawful demand ground of action), and reliance was placed on section 32(1)(c). Section 320 of the 2004 Act, enacted in July 2004, excluded the application of section 32(1)(c) of the 1980 Act in relation to taxation matters where the action was brought on or after 8 September 2003. Section 107 of the 2007 Act, enacted in July 2007, excluded the application of section 32(1)(c) where the action was brought prior to 8 September 2003.
It is apparent from that summary that the claims, so far as they relate to payments made more than six years before the proceedings were commenced, have always been dependent on the application of section 32(1)(c) of the 1980 Act. The effect of the legislation of 2004 and 2007 is thus to deprive the claimants, retrospectively, of the ability to pursue their claims so far as they relate to those payments. Since the legislation was retroactive in its effect, there was nothing the claimants could do to avoid its operation: that, of course, was the point of making the legislation retroactive.
Since the legislation retroactively restricts the possibility of repayment to claimants who brought an action within six years of the date of the payment, rather than six years of the date when their mistake was discovered or could with reasonable diligence have been discovered, it deprives persons who do not satisfy that condition of any possibility of exercising the right to repayment derived from EU law, which they previously enjoyed. In the circumstances of this case, it retroactively renders the taxes unduly paid by the BAT group prior to June 1997, and by the Aegis group prior to September 1997, irrecoverable: taxes whose reimbursement had been timeously sought under the law then in force. It therefore renders impossible in practice the exercise of rights derived from the EU treaties which national courts are bound to protect. That is the first reason why I have reached the provisional conclusion that it is contrary to EU law and cannot be relied on in these proceedings.
That conclusion does not appear to me to be affected by the argument that the legislation serves the legitimate purpose of avoiding the disruption of public finances which the present claims, and other similar claims, would otherwise cause. As the Court of Justice observed in its Marks & Spencer judgment at para 39, member states are required as a matter of principle to repay taxes collected in breach of EU law. Legal certainty, which protects both taxpayers and the administration, can justify fixing reasonable limitation periods for bringing claims for repayment, but it cannot in my view justify applying them in such a way that the rights conferred by EU law are no longer safeguarded.
Nor in my view can the present case be distinguished from such cases as Marks & Spencer on the ground that those cases concerned situations where there was only one basis on which repayment could be sought, whereas the present case concerns a situation where two grounds of action exist, with differently calculated limitation periods, and the effect of the legislation in issue is merely to apply the same method of calculating the limitation period to both grounds of action. I accept that the present case differs in that respect from the cases which have come before the Court of Justice, but the difference is in my view of no consequence. Since both grounds of action are available as means of enforcing EU rights in accordance with the principle of equivalence, it follows that the principle of effectiveness must also be respected in relation to both. The vice of the legislation in issue is not that it seeks to apply a common limitation period to the two grounds of action, but that it does so retroactively and without transitional provisions, and so fails to conform to the principle of effective judicial protection.
The principle of the protection of legitimate expectations
A further reason for my provisional conclusion that the legislation is incompatible with EU law is that it is in my view incompatible with the principle of the protection of legitimate expectations. As a general principle of EU law, this principle binds member states when implementing EU law at national level. In particular, it applies to national rules governing the protection of EU rights in national courts. The point is illustrated by Marks & Spencer (Case C-62/00) [2003] QB 866, where the Court of Justice rejected the Government’s contention that the procedural rules governing the recovery of overpayments of VAT were entirely a matter of domestic law, subject only to the Community principles of equivalence and effectiveness. As the Court held (para 44), the principle of the protection of legitimate expectations forms part of the Community legal order; and, on the facts of that case, legislation retroactively curtailing the period within which repayment might be sought of taxes collected in breach of Community law was incompatible with that principle.
It is in my opinion an even clearer breach of that principle for legislation which has the effect of reducing the limitation period applicable to actions for the enforcement of rights derived from EU law to be applied to actions which were already pending before the courts when the legislation was enacted. Although persons cannot legitimately expect that the legal rules applicable to them will not be altered, they may legitimately expect that rights which they possess will not be retroactively abridged. They are therefore entitled to expect that a claim which was not time-barred when it was made will not subsequently become time-barred as a result of retroactive legislation.
My conclusion on this point does not depend on an assumption that the claimants knew, at the time when they commenced proceedings, that their claims could validly be based upon the mistake ground of action, and could therefore benefit from the extended limitation period provided by section 32(1)(c) of the 1980 Act. Although the validity of claims to the repayment of unlawfully levied tax on the basis of mistake was strongly arguable at that time, and was of course ultimately established, I accept that it was only some years later that the point was definitively resolved by the decision of the House of Lords in DMG [2007] 1 AC 558. Although there was therefore an arguable question in 2003 as to whether the claims which they had submitted to the court were time-barred, the claimants could legitimately expect that that question would be decided by the court in accordance with a proper understanding of the law in force at the time when the claims were made. They could legitimately expect that the court’s decision of that question would not be pre-empted by retroactive legislation subsequently enacted by Parliament.
Nor does it appear to me to be material that the legislation in issue left untouched the limitation period which applied to the ground of action based on an unlawful demand. The claimants had based their claims upon both grounds of action, as they were entitled to do. The fact that their claims in respect of payments made during the six years prior to the commencement of the proceedings, so far as based on the unlawful demand ground of action, were not affected by the legislation in issue does not diminish the significance of the fact that their right to pursue claims in respect of earlier periods, on the basis of mistake, was taken away from them after proceedings relying upon that right had been commenced.
The protection of legitimate expectations is not of course an absolute principle, and even retroactive measures interfering with the administration of justice may sometimes be justified by compelling considerations relating to the public interest; and, in any assessment of whether such a justification existed, a lack of certainty as to the law at the material time might be a relevant consideration. In the present case, however, for the reasons explained in para 239, there appear to me to be no other considerations capable of outweighing the breach of legitimate expectations which resulted from the legislation in issue.
Conclusion
In view of the division of opinion on the court in relation to the compatibility of section 320 of the 2004 Act with EU law, I agree that that issue will require to be the subject of a reference to the Court of Justice in accordance with the directions proposed by Lord Hope. The other issues should in my view be dealt with as proposed by Lord Walker.
Article 26 of The Constitution &
Gibb v Maidstone & Tunbridge Wells NHS Trust
[2010] EWCA Civ 678 (
LORD JUSTICE LAWS:
INTRODUCTION
This is an appeal with permission granted by Sir Richard Buxton (on one point) and by Arden LJ (on the appellant’s remaining points) against the judgment of Treacy J given in the Queen’s Bench Division on 28 April 2009 ([2009] EWHC QB 862) by which he dismissed the appellant’s claim to enforce the terms of a severance agreement (“the compromise agreement”) and rejected her alternative claims in unjust enrichment and breach of contract.
BRIEF FACTS
The core facts of the case are crisply and accurately summarised by Treacy J at paragraphs 1 – 15 of his judgment. I see no point in replicating this basic history in different words, though I shall have to enter into greater detail on some aspects of the facts in confronting particular issues. This is what Treacy J said:
“1. This… action is brought pursuant to the terms of a contract entered into by the parties agreeing terms of severance of Ms Gibb’s employment on 5 October 2007 [sc. the compromise agreement]. The issues in the case are whether the compromise agreement was ultra vires and therefore unenforceable and whether the claimant has an alternative claim for damages if it was not enforceable.
2. Ms Gibb was appointed as Chief Executive of the Trust and as its accountable officer in November 2003. Her contract gave her an entitlement to six months notice of termination. By the date of the termination of her employment Ms Gibb’s basic salary was approximately £150,000. She also had a pension entitlement.
3. The background to the matter is that in 2006 there were outbreaks of the ‘super bug’ C.difficile at hospitals managed by the Trust. There was a significant number of deaths and widespread anger and anxiety expressed by relatives of those affected and by others. Substantial publicity had been given to the matter. The Healthcare Commission (‘HCC’) investigated the outbreaks and the measures taken to control and respond to them. The HCC produced draft reports in April and July 2007. Those drafts were shared with the Trust. Towards the end of September 2007 it was known that the final report would be published on 10 October 2007.
4. When published, the report’s conclusions were highly critical of the leadership of the Trust. It recommended that the Trust’s board must review the leadership of the Trust in the light of significant failings in order to ensure that the Trust was able to discharge its responsibilities to an acceptable standard. The report also indicated that the HCC considered the findings of its investigation to be ‘extremely serious’ and to constitute ‘a significant failing on the part of the Trust which failed to protect the interests of patients’. It will be noted that the report itself post-dated the compromise agreement, but its conclusions were known to the Trust in mid-September, in advance of publication. The witness David Flory, called by the defendant, himself a former CEO of an NHS Trust who has seen many HCC reports, described it as the most critical report he had read.
5. One of the draft reports referred to had raised issues about Ms Gibb’s probity. As a result of that, the Trust commissioned a report from its legal advisors, Capsticks, to consider such allegations. On 31 July 2007 Capsticks presented its findings to the Remuneration Committee of the Trust. The Capsticks report made no adverse finding about Ms Gibb’s probity and the Remuneration Committee unanimously concluded that having regard to that report, the Trust board should not remove Ms Gibb from her duties. The Committee also concluded that the current draft of the HCC report did not give grounds for the dismissal of Ms Gibb with respect to any other matter and noted its unanimous support for Ms Gibb from the executive members of the board. The Trust had, however, left the door open to reviewing this conclusion in the event that the final draft of the HCC report recommended that there should be change in the leadership of the Trust.
6. The local Strategic Health Authority (‘SHA’) which exercises a supervisory role in relation to the Trust was informed of the Remuneration Committee’s conclusions on 2 August 2007. During August and September 2007 there were contacts between the Trust and the SHA. It is clear from the contemporaneous documents that the SHA, anticipating the likely conclusions of the HCC final report, was encouraging the Trust to review its leadership. By 21 September 2007, James Lee, the non-executive Chair of the Trust, had considered the matter with fellow directors and was recording in a letter to the Chairman of the SHA ‘while no formal decision has yet been made, we have determined informally that the best course of action would be to encourage, or if necessary force our CEO to step down’.
7. The Trust sought written advice from Peter Edwards, a partner in Capsticks. Mr Edwards advised on 21 September 2007 that the Trust should seek a negotiated settlement with Ms Gibb, but that if such a settlement could not be achieved within a reasonable time frame she should be dismissed without cause…
8. Mr Edwards’ advice considered three options for terminating Ms Gibb’s contract and concluded with these words: ‘In the light of these matters, my advice is that the Trust’s financial exposure in this case is likely to be in the range from about £90,000 to £250,000, subject to confirmation of her notice period and salary. My advice is that a total package settlement that equated to twelve months salary and pension contributions would probably be about the norm for this type of case’.
9. On or around the 25 September 2007 Mr Glen Douglas was offered the post of Chief Executive Officer of the Trust. His appointment was to follow the termination of Ms Gibb’s employment.
10. On 28 September 2007 at a meeting of the Remuneration Committee it was decided that Ms Gibb’s contract should be terminated for three reasons:
i) the further deterioration in the performance of the Trust.
ii) the state of the management team and the need for a different style of leadership given by a new leader.
iii) the strength of the findings of the HCC report and its recommendation that the Trust board must review its leadership.
11. The Committee also concluded that it was essential that Ms Gibb’s contract be terminated well in advance of the HCC report, which was to be published on 10 October 2007. The Committee decided to seek to terminate Ms Gibb’s employment by way of a negotiated settlement. A draft compromise agreement had been prepared by Capsticks. The Trust also had advice provided by its HR Director, Terry Coode. It was decided that termination must take place in any event by 5 October 2007.
12. On 1 October 2007 Ms Gibb met the Chairman of the Trust, Mr Lee, together with the Deputy Chair, Aaron Cockell. She was told of the Trust’s decisions and that such decisions were final. She was provided with a draft compromise agreement and told that she had 96 hours in which to agree. Ms Gibb was then placed on immediate gardening leave.
13. Ms Gibb consulted her Trade Union and its appointed solicitors, Russell Jones and Walker. There were discussions between the parties, leading to the executed compromise agreement which provided for a payment of approximately £250,000.00, representing £75,427.00 in lieu of notice and a compensation payment of £174,573.00. Amongst the terms of the agreement, Ms Gibb undertook to accept the immediate termination of her employment; not to pursue any internal grievance or bring any contractual or statutory claim against the Trust; not to make any statement potentially damaging to the Trust; and not to disclose the substance of the Compromise Agreement.
14. On 11 October 2007, Mr Glen Douglas, who had taken over the role of CEO of the Trust, received a letter from David Flory, Director-General of NHS Finance, Performance and Operations, which instructed Mr Douglas as the accountable officer of the Trust to withhold the severance payment to Rose Gibb until further notice.
15. Subsequently, in 2008, the Department authorised the Trust to make a payment to Ms Gibb in respect of her six month notice period and the sum of approximately £75,000.00 was then paid to Ms Gibb without prejudice to the remaining issues in this case.”
THE ISSUES
The sum of £75,000 odd paid to the appellant (with the blessing of the Department of Health, thus the Secretary of State) was provided for in the compromise agreement to be paid in lieu of due notice to terminate the appellant’s contract of employment. Her claim in these proceedings is for the balance of the whole sum of £250,000 agreed: that is, the sum of £175,000 odd stated to be by way of a compensation payment. That is resisted on the basis, upheld by the judge, that it was ultra vires the Trust to agree the payment: it was “irrationally generous”. I shall call this the “ultra vires issue”. The appellant’s riposte is to assert that if the compromise agreement was indeed ultra vires the Trust, then she had a remedy in restitution on the footing that in the events which had happened the Trust had been unjustly enriched at her expense. I shall call this “the restitution issue”. In the alternative the appellant asserts that the Trust was in breach of its obligation of trust and confidence imposed by her contract of employment. I shall call this “the contract issue”. Sir Richard Buxton granted the appellant permission to appeal against the judge’s decision on the ultra vires issue, and Arden LJ on the two further heads of claim raised by the appellant.
THE ULTRA VIRES ISSUE
(1) LAW
I turn to the ultra vires issue. The Trust’s case is that its undertakings in the compromise agreement were “irrationally generous” to the appellant and therefore beyond its power. Though some qualifications were voiced in the course of argument, counsel were broadly agreed that a public body such as the Trust, in entering into a contractual obligation to make payments to an employee or ex-employee as was done here, is constrained by a general duty arising in public law not to enter into undertakings which may be described as “irrationally generous”. This is a term of art, since the reference to irrationality is to unreasonableness in the Wednesbury ([1948] 1 KB 223) sense – a decision so unreasonable that no reasonable decision-maker could have arrived at it.
It is of course elementary that the discretionary decisions of every public body are constrained by the Wednesbury rule. What distinguishes this case is that the decision-maker itself, the Trust, asserts its own irrationality: it seeks to escape the coils of a contractual obligation it has entered into by suggesting that it could not rationally have signed up to it. I agree with Mr White QC for the appellant that the nearest case in the books, perhaps the only other in which the decision-maker has pleaded his own alleged unreasonableness by way of defence to a claim, is Newbold v Leicesterhire CC [1999] ICR 1182. It is convenient to examine this authority before going any further.
In Newbold a contract had been entered into in 1989 between the respondent council and their street cleansing drivers, the appellants, by which the drivers would forego existing rights to extra pay for stand-by and emergency call-out duties in return for lump sums equivalent to four times the annual difference between their former and new earnings, subject to a cap of one year’s earnings. It was agreed that this new scheme should be applied to the appellants in 1991. However the council was advised (I summarise) that the multiplier of four years would be vulnerable to challenge as excessively generous. The council re-calculated downwards the payments that would be due. The appellants sued for breach of contract. The council defended the claim by asserting that the unamended scheme was, as they had been advised, irrationally generous and therefore ultra vires. The judge at first instance accepted that contention. This court allowed the appellants’ appeal. Simon Brown LJ as he then was said:
“34. It appears at first blush a remarkable proposition that a public authority can escape what on its face is a clear contractual liability to employees by asserting that the contract in question (here the application of the 1989 scheme to the plaintiffs in 1991) was excessively generous to the plaintiffs and thus outside its powers. It is not every day of the week that a local authority defends a private law claim against them by seeking to prove its own Wednesbury irrationality.
…
36… [O]ne may safely assume that no court is going to be astute to allow public authorities to escape too easily from their commercial commitments.
37. That should particularly be the case where, as here, legitimate expectations have been aroused in the other party (who clearly entered the contract in good faith), where the relationship between the parties is essentially of a private law character, where it is the authority itself which is seeking to assert and pray in aid its own lack of vires, and where that lack of vires is suggested to result not from the true construction of its statutory powers but rather from its own Wednesbury irrationality. The burden upon the authority in such a case must be a heavy one indeed. It does not seem to me that the respondent council came within measurable distance of discharging it here.”
All the considerations there described by Simon Brown LJ are present in this case, in which, for the reasons given by Simon Brown LJ, the Trust has in my judgment a very steep hill to climb. I should indicate that in my view it is unhelpful to view the Newbold case as merely an instance of the elementary principle that a public body must not exercise its powers for an improper purpose: see Roberts v Hopwood [1925] 1 AC 578. Newbold is an especially acute case because it involves a public body’s reliance on its own (putative) public law wrong. Moreover cases such as Hinckley [2000] BLGR 9 and Foster [2000] All ER (D) 2407, relied on by Miss McNeill QC for the Trust, are to be understood as instances where a local authority unlawfully sought to set in place arrangements which would allow it to make payments above a permitted statutory maximum. Allsop v North Tyneside BC [1992] ICR 639, also relied on by Miss McNeill, was specifically distinguished in Newbold.
In addition to the learning I have mentioned Miss McNeill referred also (skeleton argument paragraph 5) to s.26 of the National Health Service Act 2006, which provides “An NHS Trust must exercise its functions effectively, efficiently and economically”. The Trust’s power to make arrangements to compensate employees is conferred by Schedule 4. HM Treasury Guidance, set out in a letter of 18 August 2005 referred to as DAO(GEN) 11/05, states (I summarise) that the level of such compensation should only exceptionally exceed statutory entitlements (that is, under the employment legislation) and where that is proposed Treasury approval should be obtained. However these matters, though certainly part of this case’s context, in my judgment have no critical bearing on the result, because the Wednesbury rule (of which “irrational generosity” is as I have stated an instance) arises by force of the common law, and so constrains the conduct of the Trust irrespective of s.26 of the 2006 Act, and certainly irrespective of Treasury guidance.
(2) THE JUDGE’S CONCLUSIONS
The core of the Trust’s case is crisply expressed by the learned judge as follows:
“64. I therefore find that the Trust would reasonably have assessed liabilities to the Claimant arising out of termination of her contract as being represented by a sum to represent the contractual period of notice, together with a sum equivalent to the maximum unfair dismissal claim, giving a total of approximately £145,000.
65. That finding still leaves a gap of about £100,000 to be considered.”
The judge found (paragraph 67) that
“… the Trust’s approach to the question of additional legal and management costs was flawed. Firstly because there was no proper financial analysis done, and secondly, because since [sic: the “since” is redundant] the Trust was working on the basis that there would in the absence of a Compromise Agreement be a situation of unfair dismissal with a maximum award.”
He also found (paragraph 68) that there was a reluctance to dismiss the appellant, and that her many earlier years of good service together with the time it might well take her to find other employment played their part in fixing the terms of the compromise agreement, which accordingly did not represent payment for loss of office but for past service. In those circumstances the Trust had (paragraph 70) “paid no more than lip service to the need not to be seen to reward failure and to regard payments over and above statutory and contractual liabilities as exceptional”, so that (paragraph 71) the compromise agreement was “irrationally generous and thus ultra vires”.
(3) DISCUSSION
It is necessary to look a little more closely at the facts. We have seen that Capsticks’ advice on 21 September 2007 was that the Trust’s financial exposure to the appellant’s claim was likely to be in the range from about £90,000 to £250,000. Mr Edwards of Capsticks attended the meeting of the Remuneration Committee on 28 September 2007, when it was decided that the appellant’s contract of employment should be terminated well in advance of the HCC report (which was to be published on 10 October 2007) and that that should be achieved by means of a negotiated settlement. Capsticks had prepared a draft compromise agreement. After discussions with her trade union and solicitors the appellant entered into the contract whose essential terms I have described.
In the course of argument Mr White relied on certain written evidence from the Chairman of the Remuneration Committee which was not addressed by the judge below, although it was deployed before him. This material was provided for the purpose of a review by the Department of Health commissioned in October 2007 and completed in November 2007. While it might be said to offer no more than an ex post facto justification for the terms of the compromise agreement, it refers to a series of objective facts whose force, as perceived by the Chairman, I see no reason to doubt. This is what he said:
“We knew that our case for dismissal was weak. We knew that [the appellant] would fight and fight hard. We knew she had already briefed her personal legal advisers. We knew she had amassed a significant and powerful audit trail. We knew that if we fought, the management would be significantly distracted from their principal purpose. We had been advised that we had a poor chance of winning the case. We had been advised that we could not begin to rebuild the management team until any dispute was resolved. It was therefore abundantly clear to the committee that the costs of building and fighting any case, both tangible and intangible, would be very significant indeed. Since the assessments we had received implied a risk of £250,000 excluding any internal management time, the conclusions of the committee were completely logical and supportable…”
The judge for his part acknowledged that the Trust sought by the compromise agreement to obtain certain material advantages. He appreciated (paragraph 58), as was plainly the fact, that the Trust was anxious to terminate the appellant’s employment with a “clean break” and a confidentiality clause, obviating the “potential risk of a contest before the Employment Tribunal, which could serve to prolong the issues arising from the outbreak in the public domain, and distract the management from working to recover the position”. The judge referred also to “the cost of proceedings before the Employment Tribunal, both in legal and management terms”. These considerations, as it seems to me, sit well alongside the observations of the Chairman of the Remuneration Committee; indeed to an extent they develop the logic of what he had to say.
There was also the “Business Case” prepared by Mr Coode, the Trust’s Human Resources Director, on 26 October 2007. He stated that the likely costs of resisting an unfair dismissal claim in the Employment Tribunal would include legal costs of up to £80,000, Executive preparation time, twenty “person days”: £10,000, and Director time at a five day tribunal hearing: £2,500. Mr Coode also referred to “inestimable costs” which would arise in dealing with further media coverage and “reputational damage” which might be suffered by the Trust.
The judge was unimpressed by Mr Coode’s document as having been created after the event (paragraph 67): it was “not of great weight, since [it] is plainly an attempt to justify ex post facto the actions of the Trust”. As it happens Mr Coode gave advice to the Remuneration Committee on 28 September 2007, when he referred to a possible settlement package of up to £300,000, though the figure was not worked out. In any event Mr Coode’s document of 26 October 2007 sits perfectly well both with the observations of the Chairman of the Remuneration Committee and the summary of advantages which, as I have shown, the judge himself acknowledged were anticipated by the Trust to flow from the compromise agreement. It seems to me to be plain that the Trust was moved by the prospect of the costs, direct and indirect, overt and hidden – some perhaps unquantifiable – of meeting a tribunal claim brought by the respondent. That proposition was not so much rejected by the judge as a matter of fact; rather he attached no weight to it for the reasons given in paragraphs 67 and 68 of the judgment, to which I have already referred.
The first reason was that “there was no proper financial analysis done”. But the settlement advice given by Mr Edwards of Capsticks was, so far as it went, in the nature of a business case; I do not with respect consider that the judge was entitled to dismiss, as abruptly as he did, the contents of Mr Coode’s document of 26 October 2007; and the remarks of the Chairman of the Remuneration Committee (to which as I have said the judge made no reference) seem to me to carry considerable weight. It is to be noted, moreover, that the Trust called none of the actual decision-makers to give evidence.
More deeply the importance attached by the judge to what he saw as a want of financial rigour in the Trust’s decision-making suggests, I think, an error of approach on his part. He was concerned to decide a Wednesbury question, not to reach his own conclusions as to what financial prudence might require. That question was “for the council’s own assessment and not for the court”: Newbold at 1187D – E. To the extent (at least) that there was any scope for a range of opinions on the cost of not settling with the appellant, the Trust had to consider a series of matters not all of which were clear-cut or implied financially precise outcomes.
This brings me directly to the judge’s other two reasons for dismissing the basis on which the Trust entered into the compromise agreement. The second reason was that “the Trust was working on the basis that there would in the absence of a Compromise Agreement be a situation of unfair dismissal with a maximum award” (paragraph 67, last sentence). This is somewhat Delphic. However from earlier passages in the judgment (see in particular paragraph 59) it seems tolerably clear that the judge contemplated that absent a compromise agreement the Trust would swiftly have dismissed the appellant and no less swiftly settled with her at the maximum value of the tribunal claim which would then have been clearly open to her, thus limiting their cost exposure to a broadly foreseeable amount well below their commitment under the compromise agreement. Hence, in the judge’s view, the anticipated costs saving delivered by the compromise agreement was largely illusory. But on the evidence the position was by no means so straightforward. The Trust acted on the instructions of the Department of Health. On 11 October 2007 (see the judge’s paragraph 14, cited above) the Department instructed the Trust to withhold any payment to the appellant, and subsequently (paragraph 15) declined to authorise any payment beyond the sum due in respect of her six-month notice period. In a letter of 20 March 2008 to the Strategic Health Authority Mr Flory, Director-General of NHS Finance, Performance and Operations (who gave evidence for the Trust), stated:
“I am writing to confirm that it remains [the Department’s] position that the Trust should defend the action taken by [the appellant] and not enter into a process of negotiation which culd [sic] result in further payments being made to [the appellant] over and above the contractual entitlement she has already received. I am conscious that this course of action may involve the Trust incurring some additional costs. If indeed this materialises then I would be prepared to reimburse this to the Trust.”
In all these circumstances I do not think it can be assumed that absent the compromise agreement the Trust would have simply conceded then and there and offered to pay the maximum statutory compensation. As with most counterfactuals, or ‘what-ifs’, it is not possible to determine with confidence what precisely would have happened; but it is to my mind clear that as at 28 September 2007 when the Remuneration Committee met, the alternative to a compromise such as was proposed by Capsticks was by no means as clear-cut as a more or less straightforward calculation of the cost of an unfair dismissal claim at once conceded at full value. Miss McNeill fairly makes the point (skeleton argument paragraph 22) that the Department’s instructions to the Trust to withhold payment came after the compromise agreement had been entered into; but this by no means demonstrates that as at 28 September 2007, absent the compromise agreement, the Trust would without more have settled the appellant’s statutory claim.
There is a further point. An unfair dismissal claim is not in all respects to be equated with a common law action which a defendant can simply choose to settle by a monetary offer. Here the decision of the Employment Appeal Tribunal (presided over by Tucker J) in Telephone Information Services Ltd v Wilkinson [1991] IRLR 148 is instructive. It is enough to cite this passage from the headnote:
“An employee has a right under s.54 of the Employment Protection (Consolidation) Act to have a claim of unfair dismissal decided by an Industrial Tribunal. Such a claim is not simply for a monetary award; it is a claim that the dismissal was unfair. The employee is entitled to a finding on that matter and to maintain his claim to the Tribunal for that purpose. He cannot be prevented from exercising that right by an offer to meet only the monetary part of the claim. If that were so, any employer would be able to evade the provisions of the Act by offering to pay the maximum compensation. If employers wish to compromise a claim, they can do so by admitting it in full but they cannot do so by conceding only part of it.”
On all the facts it must, at the least, be highly problematic to suppose that the Trust might have been prepared not only to offer the maximum amount recoverable through tribunal proceedings but also to admit that the appellant’s dismissal was unfair.
In the circumstances the judge’s second reason for dismissing the basis on which the Trust entered into the compromise agreement does not in my judgment withstand scrutiny.
The third reason (paragraph 68) was that in fixing the terms of the compromise agreement the Trust had regard to the appellant’s many earlier years of good service, and the time it might take her to find other employment; and these were legally irrelevant considerations. In my judgment these matters do not by any means fall to be regarded as legally irrelevant. I do not see why an employer such as the Trust, faced in difficult and perhaps controversial circumstances with the need to terminate a long-standing employee’s contract, should be obliged in settling terms of severance to disregard past service and the employee’s future likely difficulties. In such a case a reasonable employer is not limited to the replication of the statutory maximum available to the employee through legal redress. He will not show undue favours; but the constraint of rationality will not close the door on some degree of generosity for the sake of good relations and mutual respect between employer and employee: not only for the sake of the employee in question, but it may be also for the employer’s standing and reputation as such. This position is unaffected by the terms of guidance or instructions from the Treasury, neither of which is a source of law.
For all these reasons it is not in my judgment shown that the compensation package provided for in the compromise agreement amounted to “irrational generosity” on the part of the Trust. I would accordingly allow the appeal on the ultra vires issue.
THE RESTITUTION ISSUE
If my Lords agree, my conclusion on the ultra vires issue disposes of the whole case in the appellant’s favour. But out of respect for the parties’ submissions and the judge’s views I should address the restitution issue.
This aspect of the appellant’s claim proceeds on the premise that (contrary to her primary case on the ultra vires issue) the compromise agreement is indeed void as being “irrationally generous”. On that footing the claim is formulated as restitution of the value of benefits conferred on the Trust under a void contract. In paragraph 11A of the Re-amended Particulars of Claim it is alleged that the appellant’s entering into the compromise agreement secured in the Trust’s hands the following benefits: (1) the value of the statutory unfair dismissal claim which she forewent and the costs of contesting that claim which the Trust saved, (2) the confidentiality requirement imposed on the appellant, (3) the immediate cessation of the appellant’s employment, and (4) the avoidance of any internal grievance procedure of which the appellant might have contested to the detriment of the Trust in terms of “significant human and/or financial resources”. The appellant seeks to recover (paragraph 11A(3)) “compensation or damages in the maximum sum intra vires of the [Trust], to be assessed by the Court”.
Miss McNeill submits that the law relating to unjust enrichment does not recognise a category of case in which the defendant is held to have been enriched by the claimant’s having foregone a claim against him. She observes, correctly, that the law in this field has been developed incrementally. She cites Mann J’s judgment in Charles Uren v First International Finance Ltd [2005] EWHC Ch 2529 which collects a number of germane dicta, including this from Lord Diplock in Orakpo v Manson Investments [1978] AC 95, 104C:
“My lords, there is no general doctrine of unjust enrichment recognised in English law. What it does is to provide specific remedies in particular cases of what might be classified as unjust enrichment in a legal system which is based upon the civil law.”
At paragraph 16 of his judgment Mann J held as follows:
“Having considered the wide ranging material put to me by [counsel]… it seems to me that it has not been established that the authorities have yet moved to a position in which it can be said that there is a freestanding claim of unjust enrichment in the sense that a claimant can get away with pleading facts which he says leads to an enrichment which he says is unjust… A claimant still has to establish that his facts bring him within one of the hitherto established categories of unjust enrichment, or some justifiable extension thereof.”
There is, I think, something of a tension underneath this reasoning. It is between these two propositions. (1) The categories of unjust enrichment claims cannot be closed, for if they were this branch of the law would be condemned to ossify for no apparent reason; and nothing could be further from the common law’s incremental method. But (2) such a claim must fall “within one of the hitherto established categories of unjust enrichment” which suggests (at least) that the categories rather than any overriding principle are paramount. The authorities’ reluctance to assert first principles may be ascribed to the justified fear of the palm tree: if the principle of unjust enrichment does no more than to invite one judge after another, case by case, to declare that this or that enrichment is inherently just or unjust, it is not much of a principle. That is why, with all due deference, I wonder whether Lord Hoffmann’s formulation in Banque Financière de la Cité v Parc (Battersea) Limited [1999] 1 AC 221 at 234C – D has not too much of a broad-brush or legislative flavour. He states there are four components to a claim in unjust enrichment. First, the defendant must be enriched by receipt of a benefit. Secondly, the benefit must be at the claimant’s expense. Thirdly, the defendant’s retention of the benefit must be shown to be unjust. Lastly, there must be no policy reasons for denying a remedy. The third requirement seems to be quite unqualified.
If one looks at the matter from what is perhaps a more modest standpoint, we may see at once that clear reasoning is at least required for the elaboration of any extension of unjust enrichment. Clear reasoning, if it allows a claim in seemingly new circumstances, will provide clear analogues with other cases. No doubt this is what Mann J had in mind when he qualified his reference to established categories by the phrase “or some justifiable extension thereof”.
I make these points only to show, with respect, that Miss McNeill’s forceful plea that this case lies outside the established categories of unjust enrichment may do less than justice to the subtleties of the way the law develops. For his part, Mr White submits that as matters stand a claim of this kind is well accommodated by authority. He cites Eastbourne BC v Foster [2002] ICR 234, in which the council had entered into a void and unenforceable agreement with an employee designed to enable him to qualify for enhanced pension benefits on reaching his 50th birthday notwithstanding that his post was shortly to be terminated on grounds of redundancy. At paragraph 32 of the judgment Rix LJ stated:
“Although it is impermissible to accord any validity to the compromise agreement and I agree that it therefore follows that no reliance can be placed on any promise or representation that merely reflects an alternative legal foundation for binding the council to an undertaking that it had no power to give, nevertheless the conduct of the parties still exists in the real world and cannot be ignored for all purposes. Thus, to take what I suspect would be an uncontroversial example, payments made under a void agreement, even though made in the belief that the agreement was a binding contract, have been really made, and can be taken into account for the purposes of a claim in restitution. That claim may or may not succeed, but the payments cannot be swept aside in the same way that the void agreement is reduced into nothingness by the doctrine of voidness ab initio. Similarly, services provided in exchange for those purposes have been made in the real world, and, even though the conventional scheme under which payments and services have been exchanged has vanished into thin air, the provider of those services may be entitled to have them taken into account for the purpose of a claim to a quantum meruit or quantum valebat. Indeed, in this case, the council accepts that, but for the fact that a defence of change of position rendered the enquiry mute, Mr Foster would have been entitled to be rewarded for his services on just such a basis.”
It is true, as Miss McNeill submitted, that in that case payments had actually been made over in pursuance of an ultra vires contract. But Mr White would submit that the present case does no more than build on well established ideas of justice plainly expressed in Eastbourne BC v Foster. He refers moreover to the equitable principle that giving up a valid claim may supply the “value” which has to be shown by a bona fide purchaser for value without notice: Thorndike v Hunt (1859) 3 De Gex & Jones 563, 570, and Taylor v Blakelock (1886) LR 32 Ch D 560, 568, 570. Mr White submits that such cases provide at least indirect authority for the proposition that the foregoing of a valuable claim may confer a benefit – an enrichment – on the party not so pursued.
Notwithstanding Miss McNeill’s tenacity and ingenuity it seems to me that the facts of this case are readily aligned to established categories of unjust enrichment. If everything else is equal I can see no principled distinction between a benefit consisting in money paid and a benefit consisting in a claim foregone. For the purpose of this branch of the law the material benefit may take many forms. In Way v Latilla [1937] 3 All ER 759 it consisted in providing information about gold mines and effecting introductions.
I conclude that the facts here are in principle amenable to an unjust enrichment claim. However the judge concluded that on the facts the appellant had not been enriched or received any benefit by reason of the compromise agreement’s being void: in his view any advantage obtained by the Trust accrued “because the [appellant] and her advisors with full knowledge of the stance which the [Trust] was taking as to the validity of the agreement [had] not issued proceedings in time before the Employment Tribunal” (paragraph 86). Time had expired, as I understand it, on 4 January 2008. The judge held that before that date the appellant was aware of the Trust’s reasons for withholding payment under the compromise agreement – namely that it was ultra vires – and had access to legal advice on the matter.
The judge’s conclusion looks like a straightforward finding on causation. But it masks an important distinction. The focus in this case is on the benefit, the enrichment, enjoyed by the Trust at the appellant’s expense; not on the question whether the appellant has suffered a loss which she could have avoided. The contrast is critical. In the conventional case of contractual or tortious damage, the policy of the law is of course to compensate the claimant for loss occasioned by another’s fault. In a case of unjust enrichment, the policy of the law is to strip the defendant of a benefit he has wrongly received at the claimant’s expense. In the former instance the defendant may have received no benefit whatever. In the latter, his benefit is centre stage. It is therefore no surprise that in the unjust enrichment case the law takes a much looser view of causation where the question is, was the benefit received at the claimant’s expense, than in the conventional damages case where the question is, was the claimant’s loss caused by the defendant’s fault. It is now all but a commonplace to acknowledge that a forensic assessment of causation in any given case will be heavily influenced by the nature of the interest which as a matter of justice the law seeks to protect in the particular case. Often the issue tested by causation is, where should responsibility lie? And in that case, of course, the assessment of causation is by no means a value-free exercise.
There are many judicial pronouncements in this field, but I may confine myself to what has been said specifically with reference to claims of unjust enrichment. Thus in Niru Battery Manufacturing Co (No 2) [2003] 2 All ER (Comm) 365 Moore-Bick J as he then was observed at paragraph 40 that
“a failure on the part of a claimant to take proper care of his own interests is not a ground for holding that the consequent enrichment of a third party is not unjust.”
The Court of Appeal agreed: [2004] 2 All ER (Comm) 289. This marches with what was said by Lord Hoffmann in Banque Financière de la Cité v Parc (Battersea) Limited [1999] 1 AC 221 (to which I have already referred) at 235E – F:
“But there is, so far as I know, no case in which it has been held that carelessness is a ground for holding that a consequent enrichment is not unjust.”
See also Kleinwort Benson Ltd v South Tyneside MBC [1995] 4 All ER 972 per Hobhouse J as he then was at 985:
“What contracts or other transactions or engagements the plaintiffs may have entered into with third parties have nothing to do with the principle of restitution.”
The Court of Appeal approved this approach in Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380.
I conclude that the judge’s finding based on a straightforward model of causation was, with respect, over-simplistic. It left out of account the vital fact of the Trust’s enrichment. But it is also in my view fragile (to say the least) on the evidence, which I ought therefore to address. On 17 December 2007 the appellant’s solicitors sought performance of the compromise agreement and threatened proceedings. By its reply two days later the Trust did not take the ultra vires point; they sought further time in which to consider their reply. On 21 December 2007 the appellant agreed to postpone the commencement of proceedings for one month “in order to enable your client to meet with the Department of Health”. On 17 January 2008 the Trust sought “the indulgence of [the appellant] to a further extension of at least one week”. But the date (as I have said, 4 January 2008) by which tribunal proceedings should have been commenced had already passed. On 29 January 2008 the Trust expressly took the position that they would not pay the compensation stipulated in the compensation agreement because the latter had been entered into ultra vires their lawful powers.
It was not pleaded in the Trust’s defence, originally or by amendment, that any sum alleged to be recoverable by the appellant was lost to her by reason of her own failure to issue a protective claim in the tribunal. Nor was any such argument advanced for the Trust in counsel’s written opening skeleton or written closing submissions. The appellant was not cross-examined about it.
I do not consider that the judge’s factual conclusion on causation (paragraph 86 of his judgment) can be supported; and I conclude that the appellant’s alternative case in unjust enrichment, if I am wrong on the ultra vires issue, is well made out. In sum, I would accept the submission made at paragraph 39 of Mr White’s principal skeleton argument:
“The effect of the judge’s ruling is that although the Trust was willing to pay a substantial sum of money for the benefits conferred under the compensation agreement, and has received and retained these benefits, the claimant has no remedy. That is unjust.”
Moreover I see no reason why the Trust’s enrichment should not in principle extend to all the benefits pleaded in paragraph 11A of the Re-amended Particulars of Claim (see paragraph 24 above). Mr White (principal skeleton argument paragraph 33) quotes Professor Birks’ observation (Unjust Enrichment, 2nd edn. 2005) that “[w]hat works for money must work for value received in other forms”. He refers also to County of Carleton v City of Ottawa (1965) 52 DLR (2d) 220, a decision of the Supreme Court of Canada which exemplifies the recovery of a benefit not obtained by the provision of money, goods or services to the defendant (the claimant had mistakenly discharged the defendant’s statutory duty). However given the judge’s strong reservations at paragraphs 87 – 91 of the judgment, the non-monetary elements would I think fall to be valued very modestly. The Trust’s benefit obtained by the appellant’s foregoing her claim for compensation for unfair dismissal is worth £69,590: see paragraph 33 of the judgment.
THE CONTRACT ISSUE
I propose merely to express a view on this final issue, and to do so very shortly. It is common ground, and the judge below found, that the Trust was in breach of its contractual duty of trust and confidence owed to the appellant (paragraph 112). The breach consisted in the provision of reckless assurances that the Trust had obtained all necessary approvals for the compromise agreement. But the judge held (paragraph 117) that the claim was defeated by what has become known as the “Johnson exclusion area”. This is a reference to Johnson v Unisys [2001] ICR 480, whose effect the judge described as follows (paragraph 113):
“This was a case where the employee commenced proceedings for wrongful dismissal, (having previously successfully complained to an Industrial Tribunal of unfair dismissal), alleging that, because of the manner in which he had been dismissed, he had suffered a mental breakdown and was unable to work. It was held that the matters of which complaint was made were solely within the jurisdiction of the Industrial Tribunal since Parliament had provided a remedy for the conduct of which Mr Johnson complained. It was not for the judiciary to construct a general common law remedy for unfair circumstances attending dismissal. To summarise Lord Millett at paragraphs 78 to 80 of Johnson the implied term of trust and confidence which is an inherent feature of the relationship of employer and employee does not survive the ending of the relationship. The implied obligation cannot sensibly be used to extend the relationship beyond its agreed duration.”
Mr White submits that the appellant’s claimed loss does not flow from her dismissal – if it did, it would indeed fall within the Johnson exclusion area, whose purpose is to bar from the ordinary courts claims which by statute should be brought by way of unfair dismissal proceedings. By contrast Mr White’s case is that the breach of contract in question (the reckless assurances) caused the appellant to enter into the compromise agreement, and thus sign away her potential unfair dismissal claim. She entered into the compromise agreement before the termination of her contract of employment; the fact that the loss fell in after it does not show that the termination caused the loss. This seems to me to be an entirely plausible analysis of what took place, and if it were necessary to decide the issue, I would uphold it.
The judge also rejected this head of claim on the basis that
“the loss of the right to pursue a claim for unfair dismissal does not as I have held earlier in this judgment arise either from the fact of the ultra vires Compromise Agreement or from the assurances given on the 1 October, it arises from the Claimant’s own failure to commence unfair dismissal proceedings in time when aware that the Defendant was refusing to honour the agreement on the grounds that it was ultra vires.” (paragraph 117)
I have on the facts already rejected this finding in the context of the unjust enrichment issue, where the judge first made it.
CONCLUSION
For all the reasons I have given, I would allow the appeal. If my Lords agree, counsel will no doubt assist us as to the appropriate orders to be made.
Lord Justice Sedley:
As a bystander at the execution of Admiral Byng explained to Candide:
“Dans ce pays-ci, il est bon de tuer un amiral de temps en temps pour encourager les autres.”
It seems that the making of a public sacrifice to deflect press and political obloquy, which is what happened to the appellant, remains an accepted expedient of public administration in this country.
The trustees of the hospital group of which Ms Gibb held the post of chief executive officer learnt that a damning report on its standards of patient care was coming from the Healthcare Commission. The draft report included this:
“The Healthcare Commission considers the findings of this investigation to be extremely serious, and to constitute a significant failing on the part of the trust, which failed to protect the interests of patients …”
The trustees took the view that one answer to such criticism, when the storm broke, would be that they had already taken remedial measures, and that the sacrifice most likely to propitiate the deities of Whitehall and the media was their chief executive officer, Ms Gibb. The fact that she personally had done nothing to merit dismissal was a problem, of course, but not an insuperable one. Provided the Trust was willing to pay the necessary price, she could be dismissed both unlawfully (that is to say, without notice) and unfairly (that is to say without any good cause). Both of these were quantifiable in money.
The trustees, through their remuneration committee, also wanted to show some measure of acknowledgment that Ms Gibb had given years of blameless service as CEO and that she was losing her job principally because it was she who held it at a time when serious shortcomings had been found in the hospital’s standards. Moreover, by accepting a compensation package that included a vow of silence she would be sparing the Trust a public controversy about where responsibility actually lay, the near-certainty of an adverse tribunal finding, a serious drain on management time and resources, further potential costs and – importantly – the damaging effect of all these things on staff morale and performance at a time when the Trust needed a new start.
For evidence of what the board were thereby escaping in terms of media intrusion and hostility, one need only look at Ms Gibb’s account of what happened to her:
“The NHS allowed me to be demonised by the popular press, and my family to be ‘terrorised’ by the press following my children (then aged 5 and 3) in cars to school, photographing us in moving vehicles, the press chasing us home, the press residing outside my home with long-range cameras, telephoning and harassing me and my family. This harassment included personal comments made about me by the Secretary of State, who without any reference to the Trust, or informing me, made public announcements regarding my severance value and its non-payment. This I believe was part of the process of using me as a scapegoat in order to be seen by the public to be dealing with the report …”
These would all have been potentially relevant considerations for an employment tribunal. The range within which they might be accorded a monetary value was the subject of expert legal and management advice given to the remuneration committee. The committee’s decision to go to the top of that range is explicable by the regard they chose to have to the kinds of consideration I have mentioned. While some may be regarded as self-interested, the interests were those of the Trust at least as much as of its board members personally. Their powers, moreover, by virtue of §26 of Sch. 4 to the National Health Service Act 2006, included a power to pay not simply contractual sums and damages but gratuities “by way of compensation to … any of the NHS trust’s employees who suffer loss of office or employment”.
This was the background to the bizarre legal situation now facing the court. What precipitated the claim was that the Trust was directed by the Department of Health to renege on its own agreement. Although there had been a failure to follow Whitehall guidance about clearance of such agreements (the Trust had taken the normal course in the NHS of getting approval from the strategic health authority instead), this was not the reason for the direction. The reason was that ministers wanted to be able to announce that the agreement was being blocked. The result was that the Trust, when sued by Ms Gibb for failing to honour the greater part – not the whole – of it, found itself compelled to deny its own power to enter into it. (The logical oddity of a partial nullity does not seem to have occurred to anyone until Rimer LJ raised it in the course of argument.)
The ultra vires doctrine today
The basis of the Trust’s volte-face is, or purports to be, the Wednesbury doctrine of limited powers – although, as Laws LJ pointed out during argument, the case developed by Ms McNeill QC for the Trust corresponds more nearly with the Padfield doctrine of limited purposes. I think it is necessary, in this situation, to say something about the place of the ultra vires doctrine in modern public law.
The ultra vires doctrine was imported into public law during the later part of the 19th century from its original home, company law, where it was born fully grown, like Pantagruel, in Colman v Eastern Counties Railway Co (1846) 16 L.J.Ch 73. Its aim was to stop the repeated transgression of their own legal powers by joint-stock railway companies. But by the date of the first edition of Seward Brice’s Treatise on the Doctrine of Ultra Vires (1874) it had become apparent that it was an engine of abuse in the hands of those whom it was meant to constrain, because it enabled limited companies to renege on their debts and other contractual obligations by denying their own power to incur or enter into them.
In his preface Brice wrote:
“[T]he Doctrine of Ultra Vires is constantly cropping up in unexpected quarters and manifesting its effect in an unforeseen and unwelcome manner. One of its first onslaughts was upon the time-honoured maxim of the Common Law that a man cannot stultify himself – that the lunatic, the fool, the drunkard, and the knave, who have made a contract, shall not subsequently repudiate the same by alleging that neither they nor their agents had at the time sufficient brains or authorisation to make it. This maxim the Doctrine of Ultra Vires soon demolished, and corporations may set up their own incapacity whenever it is inconvenient for them to carry out their engagements.”
It is serious enough if a private law corporation reneges on its agreements for want of power to make them (something which may, however, be rarer nowadays because of the typical breadth of articles of association). It is even more serious if a body incorporated by statute for public purposes can do so in a case such as the one before the court. This is not only because public bodies, with access to competent legal advice, can be expected not to act on whims and, when accused of doing so, are generally found not to have done so. It is because if a public body can denounce its own commercial agreements as having been excessively generous – in other words can invite the court to recalculate its liability – it will not be only at the authority’s own instance that this can happen. It will be able to happen at the instance of any person or body with a sufficient interest – here, for example, a local patients’ organisation or the Secretary of State or even (since the rule in Foss v Harbottle is not thought to apply to public corporations) a dissident member of the body itself. It does not matter, I readily accept, that this might create an entire new litigation industry: as Holt CJ said in Ashby v White (1703) 2 Ld. Raym. 938, “if men will multiply injuries, actions must be multiplied too”. What matters is that the autonomy of statutory bodies like the Trust will be irrevocably compromised: the enlargement of what counts as a public law wrong will mean that every financial decision of a public body is open to scrutiny by the courts on the motion of anyone with a sufficient interest. Only the legal profession would regard such a development as desirable.
None of this is to cast doubt on the availability of judicial review to correct excesses of power or other public law wrongs on the part of statutory bodies. But it is clear, in my judgment, that Parliament in setting up the present NHS structures intended no such thing in relation to their routine financial decisions. The 1996 Act is generous in its grant of financial autonomy to trusts. It authorises each trust to “employ such staff as it considers appropriate” and to pay them “such remuneration and allowances as it considers appropriate” (Sch.4 §25). Such powers are to be exercised in accordance with ministerial regulations and directions, but there is no suggestion that the agreement with Ms Gibb transgressed any of these. They are also to be exercised within the limits set by public law: hence the present dispute.
The use of these limits by a public authority to renege on agreements which on the face of them lay within their powers gives resonance to the note of caution sounded by Simon Brown LJ in his concurring judgment in Newbold v Leicester City Council [1999] ICR 1182, quoted by Laws LJ in §6 above. It also prompts a wider reflection about the use of what has become the Wednesbury mantra. When, by accident or by design, the voters of Wednesbury returned a majority of sabbatarian councillors who proceeded to make a by-law barring children from the local cinemas on Sundays, it was not unexpected that the owners of the Walsall Street Gaumont, a recently and expensively reconstructed picture palace with over 1,500 seats, would challenge it.[1] Nor was it unexpected, in 1948, that both the Divisional Court and this court were reluctant to intervene; but one needs to have in mind Lord Diplock’s warning in R v IRC, ex p Federation of Self-Employed [1982] AC 617, 649, that “any judicial statements on public law if made before 1950 are likely to be a misleading guide to what the law is today”. As with all Lord Diplock’s pronouncements, the choice of 1950 as a watershed will not have been arbitrary.
But, for all the reasons given by Laws LJ, I agree that there was in the present case nothing irrational, even in classical Wednesbury terms, about the severance payment which the board agreed to, and that no irrelevant considerations entered into the decision to make it. It is also necessary, in my view, to say that the time is past when this schematic and unsubtle approach to public law issues was generally useful. Without dwelling on the reasons, I would draw attention to Lord Cooke of Thorndon’s comments on the genesis of Wednesbury reasonableness in his essay ‘The struggle for simplicity in administrative law’.[2] Abuses of power, which are what all public law is at root about, are not best detected by tick-list. As Lord Greene had said in his presidential address to the Holdsworth Club ten years before he decided the Wednesbury case:
“The desire for simplification is a perennial weakness of the human mind, even the mind of judges; and the temptation to take a statement of principle out of its context of fact is one always to be resisted … by those who fully understand the proper use of precedent in the judicial method.”
This is not for a moment to say that profligate expenditure by a public body is beyond the reach of the courts. Even company law has drawn a well-known (and much-transgressed) line requiring that any cakes and ale (corporate hospitality as it is now called) must be consonant with the company’s interests: per Bowen LJ in Hutton v West Cork Railway Co (1883) 23 Ch. 654. And in public law there is at least one example of judicial auditing of civic expenditure by reason of its sheer magnitude. The High Court of Ireland in 1894 had to consider the appeal of the Dublin councillors against a surcharge for their expenditure on the picnic which accompanied their annual inspection of the Vartry waterworks in the Wicklow Hills. In a judgment (R (Bridgeman) v Drury [1894] 2 IR 489) which must rank as one of the great exemplars of judicial restraint, O’Brian CJ said:
“I think it is relevant to refer to the character of this luncheon. I have before me the items in the bill. Amongst the list of wines are two dozen champagne – Ayala 1885 – a very good branch – at 84s a dozen; one dozen Marcobrunn hock – a very nice hock; one dozen Chateau Margaux – an excellent claret; one dozen fine old Dublin whiskey – the best whiskey that can be got; one case of Ayala; six bottles of Amontillado sherry – a stimulating sherry; and the ninth item is some more fine Dublin whiskey…. There is an allowance for brakes; one box of cigars, 100; coachmen’s dinner; beer, stout, minerals in siphons, and ice for wine. There is dessert and there are sandwiches, and an allowance for four glasses broken – a very small number broken under the circumstances …
The Solicitor-General in his most able argument – I have always to guard myself against his plausibility – appealed pathetically to common sense. He asked, really with tears in his voice, whether the members of the Corporation should starve; he drew a most gruesome picture; he represented that the members of the Corporation would really traverse the Wicklow Hills in a spectral condition unless they were sustained by lunch. I do not know whether he went so far as Ayala, Marcobrunn, Chateau Margaux, old Dublin whiskey and cigars. In answer to the Solicitor-General, we do not say that the members of the Corporation are not to lunch. But we do say that they are not to do so at the expense of the citizens of Dublin.”
But none of this comes close to justifying the retaking by a court of a financial and management decision which lay within the powers and purposes of the Trust, whatever reservations the court itself might have had about the computation and cost of the deal. To start by dissecting the figures is both to assume the very thing that has yet to be established – that the Trust has exceeded its own powers – and to substitute the court’s judgment for that of the Trust. It is only if the figures are inexplicable on their face, or palpably inflated in the light of evidence, that the court will in general be justified in examining their elements, and then not in order to remake the calculation but to see if it has indeed gone beyond the bounds set by law.
Conclusions
In this situation I consider, with respect, that Treacy J erred by letting himself be drawn into acting more nearly as auditor than as judge. On the scale of severance payments not only in the private sector but in parts of the public sector, £240,000 was not on its face outlandish compensation for the arbitrary termination of a career which it was unlikely Ms Gibb would be able to resume or resurrect. If so, the only other question was whether it had been reached on a false basis. As to this, I agree with the reasons given by Laws LJ for holding that it had not.
Given my conclusion on the vires issue, which corresponds with that of the other members of the court and so is dispositive of the appeal, I prefer to express no view on the other two issues.
The effect of unwarranted departmental interference has thus been to trap the Trust between a rock and a hard place and to expose it, in its attempt to escape, to heavy legal costs. Central government (which, it seems, will be picking up the bill) might have done better to recognise that the Trust, in reaching the agreement, had been making the best of a bad job; and perhaps better still to recognise that the bad job had been the decision, which the Department does not appear to have cavilled at, to sacrifice on the altar of public relations a senior official who had done nothing wrong.
Perhaps those responsible will now reflect that, since such blame as the report allocated was subsequently accepted by the Trust’s board; all of whom resigned following publication of the report, there had been no good reason to dismiss the CEO; and that all this money, both compensation and costs, could have been spent on improving hygiene and patient care in the Trust’s hospitals.
Lord Justice Rimer:
For the reasons given by Laws LJ, I agree that Ms Gibb’s appeal should be allowed on the ultra vires issue. For the further reasons he has also given, I also agree that she is entitled in the alternative to succeed on the restitution issue. I would prefer to express no view on the contract issue.
Note 1 A historical account of the background to the case can be found in the late Professor Michael Taggart’s essay, ‘Reinventing administrative law’, in Public Law in a Multi-Layered Constitution, ed Bamforth and Leyland (2003), ch.12. [Back]
Note 2 In Judicial Review of Administrative Action in the 1980s, ed M. Taggart (1986), 1, 15. [Back]
In Re Art 26 & the Matter of the Health Act
Re [2005] IESC 7 (16 February 2005)
IN THE MATTER OF ARTICLE 26 OF THE CONSTITUTION
AND THE HEALTH (AMENDMENT) (NO. 2) BILL, 2004
DECISION of the Court pronounced on the 16th day of February, 2005, by Murray C.J.
This is the decision of the Supreme Court on the reference to it by the President of the Health (Amendment) (No. 2) Bill, 2004, pronounced pursuant to Article 26.2.1º of the Constitution.
The Reference
By order given under her hand and seal on the 22nd December, 2004, the President, after consultation with the Council of State, referred, in pursuance of the provisions of Article 26 of the Constitution, the said Bill to the Supreme Court for a decision on the question as to whether any provision of the Bill is repugnant to the Constitution or any provision thereof.
Proceedings on the Reference
Counsel were assigned by the Court to present arguments on the question referred to the Court by the President. Prior to the oral hearing counsel assigned by the Court presented written submissions to the Court, including submissions that certain provisions of the Bill were repugnant to the Constitution. Submissions in writing by and on behalf of the Attorney General were presented to the Court submitting that none of the provisions of the Bill were repugnant to the Constitution.
The oral hearing then took place before the Court on the 24th, 25th and 26th January, 2005. During the course of the hearing the Court heard oral submissions by counsel assigned by the Court and by counsel for the Attorney General.
The Legislation
The Bill in question is a short Bill and since the entire Bill is the subject of the question referred to the Court pursuant to Article 26 of the Constitution, it is appropriate to set out its terms in full:
“HEALTH (AMENDMENT) (NO. 2) BILL 2004
..
Constitutional Issues concerning the Retrospective Provisions’
Legislative Background
The provisions of the Bill which the Court now proposes to consider are those which have retrospective effect on the rights of certain persons under the provisions of the Health Act, 1970. For the purpose of considering the issues which arise concerning these provisions, the Bill has to be seen against the background of certain key provisions of the Health Act, 1970, especially Part IV. As already noted the amendments it proposes relate exclusively to s. 53. That section concerns only “in-patient services”. It is therefore relevant to recall, in the context of these retrospective provisions, the nature of those services, the obligations of the Health Boards to provide them, the persons to whom they are to be provided and the provisions regarding charging for their provision.
Section 51 of the Act of 1970 defines “in-patient services” as meaning “institutional services provided for persons while maintained in a hospital, convalescent home or home for persons suffering from physical or mental disability or in accommodation ancillary thereto”. “Institutional services” refers to that term as defined in s. 2 of the Health Act, 1947, as including:
“ (a) maintenance in an institution,
(b) diagnosis, advice and treatment at an institution,
(c) appliances and medicines and other preparations,
(d) the use of special apparatus at an institution.”
The Act of 1970 draws a distinction, for the purpose of enjoying such services, between persons having respectively “full eligibility” and “limited eligibility”. Persons in the former category are commonly described under the non-statutory name of medical-card holders. According to s. 45(1) of the Act of 1970 they are “adult persons unable without undue hardship to arrange general practitioner medical and surgical services for themselves and their dependants” and the dependants of such persons. Section 46 defines persons with limited eligibility by reference to means and is not relevant to the issues referred to the Court. The Court has been informed that no regulations have been made pursuant to s. 45(3) of the Act of 1970 and that the determination of who is entitled to “full eligibility” – a medical card – is administered by a system of departmental circulars, with the relevant chief executive officer of each health board making the decisions.
These are the persons in respect of whom Part IV of the Act of 1970 imposed upon Health Boards obligations to provide services. Health Boards are obliged, pursuant to s. 52 of the Act of 1970 to “make available in-patient services for persons with full eligibility and persons with limited eligibility”.
However, s. 53(1) of the Act states that, subject to subsection (2), which permits such charges in respect of persons with limited eligibility, “charges shall not be made for in-patient services made available under s. 52”. Regulations have been made from time to time pursuant to s. 53(2). Clearly, they were not made and could not have been made in respect of persons having full eligibility.
The interpretation of these and related provisions came before Finlay P., as he then was, in 1975 in In Re Maud McInerney, a Ward of Court [1976-1977] ILRM 229. It appears clear from the context of this case that, as was suggested by counsel during the hearing, between the passing of the Act of 1970 and the decision in the McInerney case, the practice had been to charge patients in most institutions on the basis that they were in receipt of “institutional assistance”, within the meaning of s. 54 of the Health Act, 1953, a term which meant “shelter and maintenance in a county home or a similar institution”. The nub of the McInerney decision was that the ward was in receipt of more than mere shelter and maintenance, and that there was an element of medical care involved. Relying on both the fact that the place of the provision of the services, as envisaged by s. 51 of the Act of 1970 , is a hospital or one of the other essentially health-care institutions mentioned in that definition and that the ward would not come within the alternative section (s. 54 of the Health Act, 1953 regarding “institutional assistance”) unless she was in receipt of shelter and maintenance and nothing else, the learned President interpreted s. 53 of the Act of 1970 as applying wherever the patient is in receipt of any medical care over and above pure maintenance. This decision was upheld by this Court on 20th December, 1976.
It was common case in the submissions on the reference that the relevant provisions of the Act of 1970 as interpreted in McInerney considerably narrowed the grounds on which a charge could be raised for institutional assistance. In reality, geriatric or severely disabled patients are in need of both maintenance and medical services.
The sum total of these provisions is that, by the legislation of 1970, at least following its interpretation in McInerney, the Oireachtas required and has continued to require Health Boards, at all times prior to the passing of the Bill, to make in-patient services available without charge to all persons “suffering from physical or mental disability”. While the individual circumstances of patients will vary enormously in terms of age and physical and mental capacity, it is obvious that, by enacting the Act of 1970, the Oireachtas was concerned to ensure the provision of humane care for a category of persons who are in all or almost all cases those members of our society who, by reason of age, or of physical or mental infirmity, are unable to live independently. They are people who need care. Even without the benefit of statistical or other evidence, the Court can say that the great majority of these persons are likely to be advanced in years. Many will be sufferers from mental disability. While some will have the support of family and friends, many will be alone and without social or family support. Most materially, in a great number of cases, the patients will have been entitled to and in receipt of the non-contributory social welfare pension.
This was the position in law and in fact following the enactment of the Act of 1970. The Court has been informed that on 6th August, 1976, a date later than the High Court decision and earlier than the Supreme Court decision in McInerney, the Department of Health sent a circular letter to all Health Boards. The circular informed the Boards of the terms of the Health (Charges for in-patient services) Regulations, 1976. It pointed out that, by virtue of s. 53(2)(a) of the Act of 1970, these regulations did not relate to persons with full eligibility. It went on to state:
“However, in this respect, the precise definition of a person with full eligibility in s. 45(1)(a) of the Act should be carefully noted. A person who, while he was providing for himself in his own home, was deemed to have full eligibility could be regarded as not coming within that definition when he is being maintained in an institution where the services being provided include medical and surgical services of a general practitioner kind, with consequential liability for charges under the regulations.”
It is accepted that, following Circular 7/76, Health Boards generally continued to charge patients with full eligibility for in-patient services. This may have involved the withdrawal of the relevant medical cards. The Court has been informed that the State was advised in 2004 that charges were imposed on a flawed legal basis, going back as far as 1976, on persons with full eligibility. The Attorney General has expressly accepted in his written submissions that since 1976, “there was no legal basis for imposing such charges on persons with full eligibility”. The Court must assume, therefore, given the purpose of the Bill, that charges were made in contravention of the terms of s. 53(1) of the Act of 1970.
At all events, s. 1 of the Health (Miscellaneous Provisions) Act, 2001 amended s. 45 of the Act of 1970 with the effect of placing beyond doubt any question of the legality of charging for the relevant services. That section inserted the following subsection into s. 45:
“(5A) A person who is not less than 70 years of age and is ordinarily resident in the State shall have full eligibility for the services under this Part and, notwithstanding subsection (6), references in this Part to persons with full eligibility shall be construed as including references to such persons.”
As was accepted by the Attorney General, from the date on which that section came into effect on July 1st, 2001, (see Health (Miscellaneous Provisions) Act, 2001, (Commencement) Order, 2001, S.I. 305 of 2001), there was no possible room for doubt that Health Boards were not entitled to impose any charges for in-patient services on persons aged seventy or over. While many in that category would not previously have qualified for full eligibility, a significant number obviously would. Thus, from the entry into force of that provision, all persons aged seventy or more were automatically and by that fact alone deemed to be fully eligible. Thereafter any charge imposed on such a person was indisputably imposed in direct contravention of s. 53(1) of the Act of 1970. Yet, it has been confirmed to the Court that the practice continued. It is, of course, the admitted purpose of the Bill to render lawful what was thus unlawful.
Patients’ Claims for Restitution
While the unlawful or ultra vires collection of charges from patients with full eligibility thus falls into two periods, it is not necessary for the Court, in dealing with this Reference, to maintain any distinction between them. It will assume, as is implicit in the Bill, that charges were unlawfully imposed and paid for a period as far back as 1976. The charges will, for ease of reference, be described as “unlawful charges”.
Counsel assigned by the Court have submitted that, pursuant to the modern law of restitution, patients are entitled to recover charges for in-patient services imposed by Health Boards without lawful authority and contrary to the express provisions of the Health Acts. Reference was made, in particular, to The Right Honourable The Lord Mayor, Aldermen and Burgesses of Dublin –v- Building and Allied Trades Union (hereinafter the Dublin Corporation case) [1996] 1 IR 468 and O’Rourke –v- Revenue Commissioners [1996] 2 IR 1.
Although it is not seriously disputed by the Attorney General that such payments are normally recoverable, it is necessary to consider the nature of any such claim before examining the effect upon them of the Bill and the applicable provisions of the Constitution.
In the Dublin Corporation case, compensation had been paid to the defendants for property compulsorily acquired by the plaintiff pursuant to statutory powers. Because compensation had been assessed at a figure relating to reinstatement cost rather than market value and the defendants had not spent the compensation monies on reinstatement, the plaintiff sought to recover those sums, claiming that the defendants had been unjustly enriched. Keane J., on behalf of a unanimous Supreme Court, while rejecting the plaintiff’s claim, accepted that “under our law, a person can in certain circumstances be obliged to effect restitution of money or other property to another where it would be unjust for him to retain the property.” He continued:
“The modern authorities in this and other common law jurisdictions, of which Murphy –v- The Attorney General [1982] IR 241 is a leading Irish example have demonstrated that unjust enrichment exists as a distinctive legal concept, separate from both contract and tort, which in the words of Deane J. in the High Court of Australia in Pavey & Matthews Proprietary Ltd. –v- Paul (1987) 162 CLR 221:–
“. . . explains why the law recognises, in a variety of distinct categories of cases, an obligation on the part of the defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary process of legal reasoning, of the question of whether the law should, in justice, recognise the obligation in a new and developing category of case.”
In the same year, in O’Rourke –v- Revenue Commissioners, the same judge, sitting as a judge of the High Court on an appeal from the Circuit Court, dealt with a claim by a public servant for interest on monies repaid to him by the Revenue Commissioners, which, as had been discovered, were incorrectly deducted from his salary.
Keane J. distinguished between a case where similar payments were exacted from a taxpayer who paid under protest and the case before him, where the taxpayer acquiesced without protest. Accordingly, he did not consider that the payments had been required from him colore officii as in the case of Dolan –v- Neligan [1967] IR 247, which applied to the first situation. He reiterated that, in the instant case,
“The money was clearly paid under a mistake of law, without any protest by the plaintiff and in circumstances where there was no specific element of compulsion or duress”
Having reviewed the law on the issue he concluded:
“The tax overpaid by the plaintiff was recoverable as a matter of right.”
This Court is satisfied that our law recognizes a cause of action for restitution of money paid without lawful authority to a public authority. Material elements may be whether the money was demanded colore officii, whether it was paid under a mistake of law, whether the parties were of equal standing and resources, whether the money was paid under protest and whether it was received in good faith. The decision of this Court in Rogers –v- Louth County Council [1981] IR 265 may be relevant. It is not appropriate, in the context of the present reference, to expound the precise contours of that cause of action, in the absence of evidence of particular cases. It will be apparent that a large number of patients who paid unlawful charges enjoy such a cause of action.
For the purposes of applying these principles to the cases of the patients concerned with the effects of the Bill, the Court naturally does not have the benefit of evidence regarding the actual circumstances in which individual patients paid charges levied by Health Boards without lawful authority. It is in a position, nonetheless, to draw sufficient inferences from the legislative history and the common experience of all members of our society. While we were informed that some patients protested at having to pay charges, it seems highly unlikely that, having regard to the category of persons involved, this happened to any significant extent. The patients in question necessarily belong to the most vulnerable section of society. They are, for the most part old or very old; they are, in many cases, mentally or physically disabled; they are also, very largely, in poor financial circumstances. They are most unlikely to have been aware of the provisions of the Health Acts or their rights to services or the terms on which they are provided.
Both the relevant organs of State and the Health Boards, on the other hand, were fully informed of the terms of the Health Acts, including the applicable provisions for charging for services. The charges must be regarded as having been imposed as a result of considered decisions of responsible public officials in full consciousness of those provisions.
In any event it is clear that the Oireachtas has acknowledged the existence of such claims since the avowed purpose of the Bill is to deem the charges in question lawful so as to save the exchequer the cost of having to meet legitimate claims for their recovery. In short the retrospective provisions of the Bill are premised on the existence of a quantity of such valid claims.
The Court considers that patients with full eligibility from whom charges for in-patient services were demanded and who paid them were entitled, in the absence of some strong contrary indication, to recover those charges as of right, subject, of course, to any of the defences normally available in civil proceedings. That right was that species of personal property known as a chose in action.
The Retrospective Provisions
Against this background, it is necessary to recall the essence of the retrospective provisions of the Bill. The key provision of s. 1(b) of the Bill is the amendment of s. 53 of the Act of 1970 by the insertion of a new subsection (5) whereby “it is declared that the imposition of a relevant charge is, and always has been lawful”. This provision applies only to charges paid prior to the enactment of the Bill, since subsection (11) defines “relevant charge” as a charge:
(a) imposed or purporting to be imposed under regulations made (or purporting to be made) under subsection (2), and
(b) paid at any time before the enactment of this subsection.”
It will be recalled that the subsection of the Act of 1970, there referred to, empowered the Minister to make regulations providing for the imposition of charges only in respect of persons with limited eligibility. Two points need to be made about the drafting objective of these provisions. Firstly, it would not have made any sense to say that charges imposed in the past on persons with full eligibility were, at the time, lawful. That would have been inconsistent with the direct prohibition in s. 53(1) of the Act of 1970 and, in effect, an attempt to rewrite the past. Secondly, therefore, subsection (5), (which by virtue of subsection (6) does not apply to proceedings commenced before14th December, 2004) read with subsection (11), proceeds on the basis that such charges as were imposed on such persons were received under the guise of regulations adopted under s. 53(2), i.e., on persons with limited eligibility. This was based on the apparent rationale of Circular 7/76, namely that patients with full eligibility somehow ceased to belong to that category once they were resident in an institution and in receipt of in-patient services. But, as has already been observed in this judgment, counsel for the Attorney General has accepted that charges were imposed unlawfully from and after 1976. Moreover, the Bill purports to apply to charges imposed on persons aged seventy and over, who became automatically persons with full eligibility following the entry into force of the Act of 2001.
In effect what subsection (5), in conjunction with subsections (6) and (11), purport to do, as and from the entry into force of the Bill, is to deem the combined imposition and payment of the unlawful charges concerned to be lawful, and always to have been lawful, for the purpose of enabling the State to successfully resist any claim brought after the 14th December, 2004 insofar as such a claim is for the recovery of the charges in question on the grounds that they had, at least from 1976, been unlawfully imposed.
It is, in any event, not contested by the Attorney General that the effect of the subsection is to prevent recovery of such charges paid by any persons who had full eligibility and from whom they were demanded without lawful authority at any time since the passing of the Act of 1970.
Subsection (5), being subject to subsection (6), does not “apply in the case of a relevant charge which is the subject of civil proceedings—
(a) instituted on or before 14 December 2004, and
(b) for recovery of the relevant charge.”
14th December, 2004 was the date of publication of the Bill. The Bill does not, therefore, claim to apply to any proceedings commenced before that date. The obvious purpose of the provision is to avoid any unconstitutionality which would arise from legislative interference with existing litigation, on the principle laid down by the judgment of the former Supreme Court in Buckley & Ors –v- Attorney General [Sinn Féin Funds] [1950] IR 67. It is also important to note that, although subsection (5) purports to declare all prior imposition of relevant charges to be lawful, it has that result only in respect of charges which were also actually paid. It does not apply to charges purportedly imposed on persons with full eligibility but not yet paid.
Subsection (7) provides that subsection (5) is “in addition to and not in derogation of, any other ground (whether under an enactment or rule of law) which may be raised in any civil proceedings referred to in subsection (6) to debar recovery of a relevant charge”. This provision refers principally to the possible reliance on a defence based on the Statute of Limitations. Insofar as subsection (5) has the effect of entirely barring the recovery of a relevant charge, there is little if any room for subsection (7) to have effect. Nonetheless, it appears to declare that any defence at law may be raised in the case of proceedings which are exempted from subsection (5) by subsection (6). For these reasons, no argument has been advanced suggesting that subsection (7) is repugnant to the Constitution.
The principal combined effect of the provisions of subsections (5), (6) and (11) is to debar the recovery of charges demanded of and paid by persons with full eligibility, without lawful authority. It extinguishes the property right of those persons, consisting of a chose in action. It also does so by means of what is accepted as being retrospective legislation.
Submissions
Counsel assigned by the Court have, in dealing with subsection (5) and its related provisions, concentrated principally on its retrospective character.
Article 15.5
That Article of the Constitution, provides that the Oireachtas shall not “declare acts to be infringements of the law which were not so at the date of their commission”. Counsel assigned by the Court accepted that, in principle, the Oireachtas has the competence to adopt legislation which validates actions which were unlawful at the time they were committed. It may not, however, make unlawful any act which was, when committed, lawful. Counsel assigned by the Court submitted that subsection (5) implicitly renders it retrospectively unlawful to have failed to pay charges whose payment is declared always to have been lawful. Non-payment of these charges was, at all relevant times after 1976 lawful but has now been rendered retrospectively unlawful. The Attorney General stressed that subsection (5) is worded so as to apply only to the “imposition and payment” of a charge and, thus, does not apply where for any reason a charge was not paid.
Article 15.2.1
Under that Article, the “sole and exclusive power of making laws for the State is vested in the Oireachtas”. The Oireachtas, by s. 53(1) of the Act of 1970, laid down a legislative policy that Health Boards could not impose charges for in-patient services on persons with full eligibility. Counsel assigned by the Court submitted that the Oireachtas does not have the power retrospectively to validate actions which, when they were committed, were in contravention of the law. Where the Minister had power, pursuant to s. 53(2), to adopt regulations imposing charges in relation to persons with limited eligibility, but this was expressly prohibited by s. 53(1) in the case of persons with full eligibility, he would be acting ultra vires and unconstitutionally, if he purported to adopt regulations of the latter type. He would have been performing a legislative function. This distinguishes the Bill from other types of curative or validating legislation. This was not a case of a mere technical deficiency or want of power but entailed a violation of a provision of an Act of the Oireachtas. Reliance was placed on the dictum of Walsh J. in Shelly v District Justice Mahon [1990] 1 IR 36 at p. 45 that “an unconstitutional procedure cannot subsequently be declared by the Oireachtas to have been constitutional”. Counsel for the Attorney General pointed to a number of express restrictions in the constitutional text on the legislative power of the Oireachtas but said that there was no basis for saying that there can be some additional unidentified but implied restriction of the type alleged. The Bill is a type of curative legislation of which many examples had been enacted by the Oireachtas of Saorstát Éireann and the framers of the Constitution must have been conscious of the possibility of that type of legislation at the time of adoption of the Constitution. Counsel relied on the statement of Keane C.J. in Director of Public Prosecutions –v- Leontjava, Supreme Court, Unreported, 23rd June, 2004, that “…the Constitution affords a strikingly wide latitude to the Oireachtas in adopting whatever form of legislation it considers appropriate in particular cases”. Counsel also cited Pine Valley Developments Limited & Ors –v- Minister for the Environment and the Attorney General [1987] IR 23. This part of the argument led to extensive citation of United States authorities. Counsel assigned by the Court relied upon: Forbes Pioneer Boat Line –v- Board of Commissioners of Everglades Drainage District (1922) 258 US 338; Graham –v- Goodcell (1931) 282 US 409; Washington National Arena Limited Partnership et al. -v- Treasurer, Prince George’s County, Maryland (1980) 410 A.2d 1060. The Attorney General relied principally on United States –v- Heinszen (1907) 206 US 370.
Article 43
Counsel assigned by the Court submitted that, assuming that the Oireachtas had power to enact retrospective legislation in contradiction of its existing declared legislative policy, the Bill, nonetheless, infringes Article 43 read together with Article 40.3.2 of the Constitution, because it adversely affects vested interests. The persons who wrongly paid charges have a legal right to recover the charges exacted from them. This constitutes a claim in debt which is, for example, assignable. It constitutes a constitutionally protected property right (O’Brien –v- Manufacturing Engineering Limited [1973] IR 334) as well as a right to litigate, though this distinction may not be material. Reference was also made to Moynihan –v- Greensmyth [1977] IR 55, to Foley –v- Irish Land Commission [1952] IR 118, O’Callaghan –v- Commissioners of Public Works [1985] ILRM 364, Dreher –v- Irish Land Commission [1984] ILRM 94 and to Attorney General –v- Southern Industrial Trust (1957) 94 ILTR 161. The effect of the Bill is to abolish the right in its entirety and without any compensation. Reference was made to Hamilton –v- Hamilton [1982] IR 466. It was pointed out that, in Re Article 26 of the Constitution and the Planning and Development Bill, 1999 [2000] 2 IR 321, Keane C.J. said (at p. 352):
“There can be no doubt that a person who is compulsorily deprived of his or her property in the interests of the common good should normally be fully compensated at a level equivalent to at least the market value of the acquired property.”
The effect of the Bill is to abolish the property rights in question in their entirety without compensation. This is an “unjust attack” on those rights for the purposes of Article 40.3.2 of the Constitution. This Bill does not merely delimit such rights by law in the interests of the common good, as envisaged by Article 43.2.2 of the Constitution. There is no balancing of competing constitutional rights, as claimed by the Attorney General. The only justification advanced is the financial interest of the State. This is not a case such as Tuohy –v- Courtney [1994] 3 IR 1. The Attorney General argues that the Bill is justified in the interests of the common good and that, in particular, it is concerned to cure a lacuna in legislation. There was never a substantive constitutional right to receive in-patient services free of charge. At most there was a statutory right to receive a benefit. In correcting the problem that arose, when the illegality was discovered, the State was concerned to balance social and economic considerations. These are matters peculiarly within the competence of the Oireachtas, rather than the courts, and the Bill enjoys a heightened presumption of constitutionality.
Proportionality
Counsel assigned by the Court drew attention to the test of proportionality as explained in Heaney and McGuinness –v- Ireland [1994] 3 IR 593 and approved in Re Article 26 of the Constitution and the Employment Equality Bill, 1996 [1997] 2 IR 321. The elements necessary, where a restriction of a right is involved, as explained by Costello J. in the former case, at p. 607, are that the restrictions must:-
“be rationally connected to the objective and not be arbitrary, unfair or based on irrational considerations;
impair the right as little as possible, and
be such that their effects on rights are proportional to the objective…… ”
The Bill does not merely interfere with the right. It proposes to abolish it in its entirety. It was submitted, on the authority, inter alia, of the Australian case, Georgiadis –v- Australian and Overseas Telecommunications Corporation (1994) 179 CLR 297, that the abrogation of a cause of action without compensation was unconstitutional. There is no pressing justification for the Bill such as could be examined for proportionality in the exigencies of the common good. The sole justification is the need of the State not to have to make restitution of charges unlawfully exacted. It was submitted that, in the case-law of the European Court of Human Rights, financial considerations of a respondent government have only in very exceptional circumstances been considered to justify interference with protected rights. Reliance was placed on Pressos Compania SA –v- Belgium (1995) 21 EHRR 301, where a Belgian law exempting the State and providers of pilot services from liability for negligence, including liability for claims in being, was held to interfere with property rights guaranteed by Article 1 of Protocol 1 of European Convention on Human Rights and Fundamental Freedoms. While the Court held the legislation to be justified prospectively by the very large expense to the Belgian state, it was not justified insofar as it deprived the applicants in existing cases of their claims. Reference was also made to Zielinski –v- France (2001) 31 EHRR 19 and to National Provincial Building Society & Ors –v- United Kingdom (1997) 25 EHRR 127. The Attorney General places particular reliance on the last-mentioned case. These cases will be discussed more fully at a later stage in this judgment.
Article 40.1
Counsel assigned by the Court submitted that the Bill would give effect in three respects to invidious discrimination which would be repugnant to Article 40.1 of the Constitution. Firstly, s. 53(5), by validating retrospectively the imposition of charges on those who had paid but not on those who, in identical circumstances, had not paid, the Bill would discriminate, without any rational basis, between persons in identical legal situations. Secondly, s. 53(6) would discriminate between those who had and had not instituted legal proceedings prior to 14th December, 2004. Thirdly, the same subsection would discriminate between persons who had instituted proceedings for the recovery of the charge and those who had instituted proceedings by way of judicial review or otherwise merely for a declaration that a charge had been invalidly imposed. It was submitted that there was no justifiable rational difference or distinction, legal or moral, between these categories of persons, who comprised a single class. Reference was made to the dictum of Barrington J. in Brennan –v- Attorney General [1983] ILRM 449 at p. 480, and approved in the judgment of the Court in Re Article 26 of the Constitution and the Employment Equality Bill, 1996 [1997] 2 IR 321 that “the classification [adopted by the Oireachtas] must be for a legitimate legislative purpose … it must be relevant to that purpose, and that each class must be treated fairly”. Counsel also referred to Dillane –v- Attorney General [1980] ILRM 167 at 169, O’B. –v- S. [1984] IR 316 at 335 and Quinn Supermarkets Ltd –v- Attorney General [1972] IR 1. Counsel assigned by the Court submits that it constitutes invidious discrimination to provide that those who paid are disadvantaged by not having their money back, whereas those who did not pay are privileged by being allowed to keep the money. Furthermore, s. 53(4), while empowering the Chief Executive Officer of a health board to reduce or waive a charge imposed for the future, does not apply to those who paid in the past. Counsel for the Attorney General submits that, in each of these cases, the distinction was such as the Oireachtas was entitled to adopt. The Court in Re Article 26 of the Constitution and the Employment Equality Bill, 1996 held at p. 346 that Article 40.1 of the Constitution, recognizes the “legitimacy of measures which place individuals in different categories for the purposes of the relevant legislation.” In Re Article 26 of the Constitution and the Planning and Development Bill, 1999 [2000] 2 IR 321 Keane C.J., delivering the judgment of the Court, said:
“where classifications are made by the Oireachtas for a legitimate legislative purpose, are relevant to that purpose and treat each class fairly, they are not constitutionally invalid.”
The Oireachtas was entitled to consider that the retrospective levying of charges not already paid might infringe Article 15.5 of the Constitution and to take the view that to seek recoupment of charges from such persons at this stage could cause unnecessary hardship. Equally the legislature was entitled to distinguish between those who had instituted proceedings for recovery of charges before14th December, 2004, and those who had not done so. Legislative interference with the former would have amounted to an interference “…with the operations of the courts in a purely judicial domain”, deemed to be incompatible with the Constitution in Buckley & Ors –v- Attorney General [1950] IR 67. Not to have included a provision such as s. 53(6) would manifestly have defeated the purpose of the Bill, as a large number of claims would inevitably have been launched after the publication of the Bill, if some cut-off date had not been provided. Reliance was again placed on Pine Valley Developments Limited & Ors –v- Minister for the Environment and the Attorney General [1987] IR 23. Finally, it was stated that there were not in existence on 14th December, 2004, any proceedings other than of the type specified in subsection (6)(a).
Article 34
Counsel assigned by the Court submitted that the combined effect of subsections (5) and (6) is to enable proceedings commenced before 14th December, 2004, seeking recovery of a relevant charge to survive, but not proceedings for judicial review or declaratory relief, such as have been mentioned in the immediately preceding paragraph under the heading of alleged discrimination. Counsel for the Attorney General submitted that any such claims would be entirely moot and would not, if they existed, be entertained by any Court. If they were not designed to recover any charge, they would not serve any purpose. Thus the subsection would not interfere in any meaningful way with the administration of justice.
Submissions of Attorney General re Murphy –v- Attorney General
The Attorney General, in his defence of the Bill, relied in particular on the decision of this Court in Murphy –v- Attorney General [1982] IR 241. While it would not be true to characterize it as the sole basis put forward to justify interference with the constitutional property rights of patients affected by unlawful charges, it undoubtedly loomed large both in written submissions and at the hearing. In that case, the Court held to be unconstitutional certain provisions of the Income Tax Act, 1967, which provided that the income of married couples be aggregated, resulting in the imposition of tax on a married couple at a higher rate than would be imposed on two single persons in identical circumstances. Following the delivery of its judgment, the Court agreed to an exceptional procedure whereby it would pronounce on the future effects of the declaration. Although there were differences between the judgments and one dissenting judgment, it is accepted that the majority judgment was that of Henchy J., who posed, at p. 306, the specific question:
“Where the plaintiffs have paid, or have had deducted from their earnings, income tax collected under statutory provisions which were subsequently declared unconstitutional, can they recover back such income tax. If so, to what extent? It is a question of profound importance, not only for the plaintiffs and similar taxpayers, and not only in terms of the fiscal arrangements and requirements of the State, but also in a wider context, for its resolution involves a consideration of the further question whether, and to what extent, what has been done pursuant to, or what has happened on foot of, an unconstitutional enactment may be revoked, annulled, rectified, or made the subject of a claim for damages or for some other form of legal redress.”
Full consideration of this important judgment will be necessary at a later point of this judgment. In essence, counsel for the Attorney General explained how Henchy J. had expounded the modern law of restitution as showing that while persons are normally entitled to repayment of monies, “there may be transcendent considerations which make such a course undesirable, impractical, or impossible” (see p. 314). These considerations could, he continued, include “factors such as prescription (negative or positive), waiver, estoppel, laches, a statute of limitation, res judicata, or other matters (most of which may be grouped under the heading of public policy)…”
Following a detailed review of authorities, Henchy J. concluded that, other than the plaintiffs in the very action who had mounted the constitutional challenge, and in their case only for a limited period, no other taxpayers should be held entitled to recover taxes collected from them in reliance on the unconstitutional provisions. Counsel for the Attorney General accepted that the Murphy case related purely to the exercise of judicial power, but submitted that, in the constitutional order, it was equally logical for the legislature to have such a power. Counsel submitted that the Murphy decision applied to the collection of taxes from married couples pursuant to a statute which had been held to be repugnant to the Constitution and, hence, deemed to have been void ab initio, whereas the unlawful charges were collected under the Health Acts on an ultra vires, but not an unconstitutional, basis. Furthermore, the persons concerned had received benefits from the State. It was submitted that the Bill is rooted in almost identical policy considerations. It was submitted strongly that the Bill represented the policy determination of the executive and the two Houses of the Oireachtas, organs of government directly accountable to the People, in relation to the finances of the State. Council for the Attorney General relied on the decision of the Court of Human Rights in National Provincial Building Society & Ors –v- United Kingdom (cited above) in support of their submissions based on Murphy.
Counsel assigned by the Court distinguished Murphy. They pointed out, firstly, that Henchy J. (at p. 318) attached importance to the presumption of constitutionality which prevailed at all times when the relevant taxes were paid and that the State was entitled to rely upon it. In Murphy, the Court accepted that the taxes in question had been received bona fide by the State, whereas in the case of patients wrongly charged for in-patient services, there was no such presumption. The charges were imposed in circumstances of clear illegality and the Bill precludes any inquiry as to whether the charges were imposed in good faith.
Conclusions on several issues raised by Counsel
Before dealing with what the Court sees as the core issue concerning the constitutionality of the Bill, there are a number of questions which arise from the submissions of counsel on both sides which the Court considers convenient to address at this stage.
Article 15.5
The first of these issues is that raised by counsel assigned by the Court as to the meaning and the effect of Article 15.5 of the Constitution which restricts the Oireachtas from adopting legislation with a certain kind of retrospective effect.
Article 15.5 of the Constitution provides:
“The Oireachtas shall not declare acts to be infringements of the law which were not so at the date of their commission.”
The Court is satisfied that no provision of the Bill offends this provision. Subsection (5) merely purports to render lawful the payment of charges, the payment of which was required and which were paid without lawful authority in the past. It does not now seek to render unlawful the failure of any person to pay charges in the past. If it did so, it would infringe Article 15. Accordingly, the Court should, in observance of the presumption of constitutionality which applies to Acts of the Oireachtas, including bills referred to the Court pursuant to Article 26 of the Constitution, interpret the Bill so far as possible so as to bring it into harmony with the Constitution. It is only on a strained interpretation that this particular Bill could be read as rendering unlawful the failure, in the past, of recipients of in-patient services to pay for them. On the contrary, the Bill is careful to render lawful only charges which were in fact paid. Thus, it is unnecessary to adopt any interpretation other than the literal one of the Bill.
US Cases: Restrictions on Curative Legislation
The next question concerns a proposition advanced by counsel assigned by the Court, which they conceded was rather novel, that, even under its general legislative power, and apart altogether from any injustice to persons with vested rights, the Oireachtas did not have power to adopt curative legislation purporting to validate past acts which were expressly prohibited by the legislation then in force. This contention is founded on certain United States case law. However, it is appropriate to consider, in the first instance, the provisions of the Constitution. Article 15.2.1 provides that:
“The sole and exclusive power of making laws for the State is hereby vested in the Oireachtas: no other legislative authority has powers to make laws for the State.”
The Constitution itself, however, places a number of restrictions, express or implied, on the scope of the legislative power. Most importantly, Article 15.4.1 provides that:
“The Oireachtas shall not enact any law which is in any respect repugnant to this Constitution or any provision thereof.”
Furthermore, the Constitution confers express jurisdiction on the High Court to consider “the question of the validity of any law having regard to the provisions of this Constitution”. This is by no means a common or usual power among the constitutions of the world. No corresponding power was contained in the Constitution of the United States of America and it fell to the Supreme Court of that nation to discover that it existed. The boundaries of the legislative power of the Oireachtas are, other than in the important case of the laws of the European Union, to be found within the Constitution itself. Counsel for the Attorney General drew attention to a number of express restrictions on the power, instancing certain electoral provisions. Another obvious example might be that no law could be passed providing for the conferring of titles of nobility (Article 40.2.2). In practice, the most important restraints on legislative power have been found to flow from the guarantees of fundamental rights declared in Articles 40 to 46 of the Constitution.
Nonetheless, having recognized these clear constitutional limits, the consequence of the role of the Oireachtas as the sole and exclusive law-maker for the State means that, in principle, it may legislate on any subject. There is no subject-matter in respect of which it is incompetent to legislate. The Oireachtas is the parliament of a unitary state. The Constitution of a federation necessarily designates the respective competences of the federal government and its component states or provinces. Keane C.J., as already cited, stated, with the agreement of the other members of the Court, in Director of Public Prosecutions –v- Leontjava, Supreme Court, Unreported, 23rd June, 2004, that “…the Constitution affords a strikingly wide latitude to the Oireachtas in adopting whatever form of legislation it considers appropriate in particular cases”. He was speaking, in that case, of the form rather than the subject-matter of legislation. Nonetheless, his words are equally apt if considered in the latter context.
In deference to the careful arguments of counsel assigned by the Court, it is appropriate to consider the authority advanced for the proposition that, having regard to the legislative background and history, the legislative power should be so limited as to deprive the Oireachtas of the power to enact the Bill. It is convenient to refer to the first in time of the American cases. It is United States –v- Heinszen (1907) 206 US 370. The entire matter arose against the background of the Spanish-American War. The President of the United States, while the islands were under the military control of the United States during the war, in the exercise of executive power, made orders imposing tariffs on goods imported into the Philippines. These were valid and lawful. However, upon the ratification of the treaty of peace with Spain, the Philippines were no longer a foreign country and the tariffs, though they continued for a time to be collected, were unlawful. A validating statute was passed by Congress with retrospective effect. The Supreme Court upheld the validity of this curative act, principally on the basis of ratification of the unauthorised act of an agent. Forbes Pioneer Boat Line –v- Board of Commissioners of Everglades Drainage District (1922) 258 US 338 was decided in 1922. It concerned the unlawful collection of tolls for passage through a lock of the defendants’ canal. A retrospective Florida statute purported to validate the collection. Holmes J. distinguished Heinszen. He said:
“But, generally, ratification of an act is not good if attempted at a time when the ratifying authority could not lawfully do the act………If we apply that principle this statute is invalid. For if the legislature of Florida had attempted to make the plaintiff pay in 1919 for passages through the lock of a canal which took place before 1917, without any promise of reward, there is nothing in the case as it stands to indicate that it could have done so any more effectively than it could have made a man pay a baker for a gratuitous deposit of rolls.”
At a later point, having explained away some cases in which acts done in the name of the government had been ratified and cases of slight technical defect, he thought that in these cases “the meaning simply is that constitutional principles must leave some play to the joints of the machine”. The principal ground for the decision in Forbes appears to have been that, at the time of passage through the canal lock, there was no power to collect tolls. However, it seems plain that they were, in fact, collected and paid. Thus it is difficult to follow the analogy with the baker’s free supply of rolls. The reference to “play to the joints of the machine” suggests that there was no compelling distinction between that case and Heinszen. In the much more recent case of Washington National Arena Limited Partnership et al. –v- Treasurer, Prince George’s County, Maryland (1980) 410 A.2d 1060 the Court of Appeals of Maryland attempted a reconciliation of the above “two leading Supreme Court cases”, while acknowledging that “the line between permissible ‘curative’ legislation and unconstitutionally retroactive legislation has been some what difficult to draw” (see p. 1065). It appears to have concluded that, in Forbes, the Commissioners “were, at the time of the toll collections violating the legislative policy as ascertained by the courts” (emphasis added) (p. 1067). The underlined expression appears important. It echoes the remark of Holmes J. that “the transaction [collection of tolls] was not one for which payment naturally could have been expected” which falls well short of an express prohibition on the collection of tolls. Finally, the Maryland Court warned that its distinction between Heinszen and Forbes could not always “like a mathematical formula” determine whether curative legislation should be upheld. In a later reference, Van Emmerik –v- Janklow (1982) 454 US 1131, it appears that the court, in 1982, acknowledged “the difficulty in discerning the difference between permissible curative legislation and unconstitutionally retroactive legislation”. It notes its duty to “define this boundary”. This Court does not find it possible to discern from the American cases any clear principle regarding permissible retrospective legislation, which would warrant its adoption in the context of interpretation of our Constitution. The American context is quite different. There is no basis for imposing a priori limits to the nature of retrospective legislation, other than those which are to be derived from the Constitution itself, as interpreted by this Court.
Murphy –v- Attorney General
Finally, before considering what the Court considers to be the core constitutional issues, it is at this point appropriate to consider the extent to which the judgments of this Court in Murphy –v- Attorney General [1982] IR 241 may be considered to have a bearing on the constitutional issues which arise in respect of the provisions and on which counsel for the Attorney General relied so extensively in their submissions. In doing so the Court must give careful consideration, firstly, to the judgment of the majority of this Court pronounced by Henchy J. in Murphy –v- Attorney General. The circumstances in which that judgment came to be given were unusual if not unique in the history of this Court. On 25th January, 1980, the Court, on appeal from the judgment of Hamilton J., as he then was, gave judgment declaring ss. 192 to 198 of the Income Tax Act, 1967, to be repugnant to the Constitution. The appeal, being taken by the Attorney General, concerned only the issue of constitutionality. The plaintiffs had included in their proceedings a claim for accounts and inquiries as to the amounts of tax overpaid by them as a result of the impugned sections and their repayment. This had not been the subject-matter of the appeal. Following the delivery of judgment on 25th January, 1980, the Attorney General –not, be it noted, the plaintiffs—applied to be allowed to “speak to the minutes of the order”. His purpose was to ascertain the extent to which the plaintiffs could sustain their claim for accounts and inquiries. In reality, the concern of the State related to the extent to which it might be compelled to make repayments of overpaid tax to persons similarly situated. The Court, Henchy J. dissenting, agreed to hear this application. This procedure related only to the claim of the plaintiffs in Murphy. Although the decision had implications for other taxpayers, the Court did not formally rule on their cases. Apart from repeating his principled objection to this procedure, Henchy J. pointed out that “the facts had not yet been fully investigated”. Nonetheless, it is apparent from his judgment that the Court had at its disposal a significant amount of information about the amounts of tax paid by the plaintiffs, the extent of the impact on them of the impugned sections and the date when they first objected: see pp. 217 and 318. It may be observed that, in the present cases, the Court has no information at all about the circumstances or even the name of any patient who has paid the unlawfully imposed charges, which are purportedly retrospectively validated by the Bill.
It is necessary, however, to examine the judgment delivered by Henchy J. on the issue. It is of the first importance to observe that the judgment of Henchy J. is not authority for the proposition that persons from whom money has been unlawfully collected by the State, whether in the form of taxes or otherwise, are not entitled to recover those amounts. The contrary is the case, as appears at several points in the judgment. The consequence of a declaration that a law is repugnant to the Constitution is that (see p. 313): “from the date of its enactment the condemned provision will normally provide no legal justification for any acts done or left undone, or for transactions undertaken in pursuance of it; and the person damnified by the operation of the invalid provision will normally be accorded by the Courts all permitted and necessary redress;” and at p. 314 that “it is central to the due administration of justice in an ordered society that one of the primary concerns of the Courts should be to see that prejudice suffered at the hands of those who act without legal justification, where legal justification is required, shall not stand beyond the reach of corrective legal proceedings…;” at p. 316, referring to monies collected under the condemned sections: “Whether the action be framed at common law for money had and received or (as here) in equity for an account of money held as a constructive trustee for the plaintiffs, I would hold that, in the absence of countervailing circumstances (to which I shall presently refer), such money may be recovered;…” at p. 317, referring specifically to the plaintiffs claim: “Any one of such payments would normally be recoverable as money exacted colore officii, for the nature of PAYE collection of income tax is such that in the relevant period the plaintiffs’ salaries were subject to compulsory deduction by their employers of the income tax which was exigible under the now condemned statutory provisions. The payments were, therefore, involuntary to the point of being compulsory collections.”
It is clear, therefore, that Henchy J. pronounced in favour of a general rule of recovery of amounts of money unlawfully collected by the State or State authorities. The Attorney General relies, of course, on his several statements, at p. 314, that this is “not a universal rule” and that there may be “transcendent considerations.” The same page contains the following passage:
Over the centuries the law has come to recognize, in one degree or another that factors such as prescription (negative or positive), waiver, estoppel, laches, a statute of limitation, res judicata, or other matters (most of which may be grouped under the heading of public policy) may debar a person from obtaining redress in the courts for injury, pecuniary or otherwise, which would be justiciable and redressable if such considerations had not intervened.”
Each of the circumstances here described is an instance of a defence to a lawful claim, which, therefore, presupposes the existence of a valid claim. It is, of course, possible that patients seeking recovery of charges unlawfully required of them would be met and perhaps defeated by some such defence. The right to put them forward is preserved by subsection (7) of the Bill. To extinguish the claims entirely, without permitting a claim to be advanced, is an entirely different matter.
Henchy J. cited, at p. 319, a number of authorities from other jurisdictions suggesting that there may be circumstances in which full restitution would be inequitable. In particular, a New Zealand statute allowed relief to be refused in full or in part where monies have been received in good faith and the recipient has so altered his position as to render full restitution inequitable. The Bill, however, contains no provision for inquiry as to whether the charges were received in good faith. The claims are to be extinguished whether or not the monies were collected in good faith. In this connection, it is particularly material that, apart altogether from the express prohibition of charging contained in s. 53(1) of the Act of 1970, as and from 2001, all persons aged seventy or over were entitled by statute to be treated as having full eligibility regardless or means. Nonetheless, collection of charges continued. Counsel for the Attorney General frankly and rightly accepted at the hearing that there was no conceivable basis upon which anybody could reasonably have thought the charges could lawfully be levied or collected from persons aged seventy or over after that time. He also accepted the possibility that some such fully eligible persons had made protests. The Court is satisfied, accordingly, that the Murphy judgment offers no support for the Bill, insofar as reliance is placed on equitable principles relieving defendants from full restitution on the grounds of good faith.
It is also necessary to consider the precise grounds, set out at pp. 319 and 320, for refusing recovery to the plaintiffs in Murphy beyond the date upon which they had instituted their proceedings. Henchy J. commences by recalling the presumption of constitutionality, stating that it is beyond question that the State in its executive capacity received the moneys in question in good faith, in reliance on the presumption that the now condemned sections were favoured with constitutionality. Clearly, the unlawful collection of charges, at present under consideration, was not protected by any presumption, constitutional or otherwise. For the reasons mentioned in the preceding paragraph, the State is not in a position to rely on any presumption of good faith. This is not to say that monies were necessarily collected in bad faith. Rather, as already stated, the Bill permits no inquiry as to whether there was good or bad faith. The validation of the unlawful collection of charges is the very justification and sole reason for which the Oireachtas came to enact retrospective validating legislation.
Finally, it is necessary to consider the decision of the European Court of Human Rights in National Provincial Building Society & Ors –v- United Kingdom (1980) 25 EHRR 127 which counsel for the Attorney General cited, in effect, as being analogous to and in support of their reliance on the decision in Murphy –v- The Attorney General. That decision arose from a long and extremely complex history of tax legislation and attendant litigation in the courts of England and Wales and then at the European Court. In deference to the strong reliance placed upon it, it is necessary to explain its background. Building societies in England collect tax from their deposit-holders, which they remit to the Inland Revenue. For a number of years, there existed an extra-statutory arrangement under which the societies negotiated a composite tax rate (taking account of the varying tax rates applying to their customers) and paid over tax in each year by reference to a preceding equivalent period. Different societies used different reference periods. It was decided, in the mid-1980s, to place the entire system on a new statutory footing. This involved abandoning the preceding-year basis. As a result, there was a “gap period” between the old and the new periods for which tax was paid. Regulations were adopted, containing provisions to enable tax to be recovered for the “gap periods”. These were held to be invalid in the English courts, for what the UK Government told the European Court of Human Rights, and it accepted, were “purely technical” reasons, and which do not concern us. The Woolwich Building Society successfully brought proceedings for recovery of tax paid under the invalid regulations, coincidentally those already cited regarding the law of restitution. Parliament passed retrospective legislation validating the regulations and excluding any recovery claims other than those of the Woolwich. There was a large dispute between the societies and the UK Government as to whether the effect of this legislation was to impose double taxation on the societies or whether the effect of the invalidation of the legislation was to confer very large windfall gains on the societies. It is vital to a proper understanding of the decision of the European Court to note that it fully accepted the Government’s position. The Court found that the societies had deducted the tax for the gap periods from interest paid to their investors and that these amounts were lodged in their reserves. The Court said (para. 59):
“It is an inescapable conclusion that had steps not been taken to bring those amounts into account in the move from the prior period system to the actual-year system, the applicant societies would have been left with considerable sums of money representing unpaid tax.”
The Court rejected the argument that there was double taxation. There was mere acceleration of payment. The Court accepted that the effect of the retrospective legislation was to deprive the applicant societies of the right to bring a claim of the same type as the Woolwich, but considered that these would be “opportunistic legal proceedings to exploit technical defects in the …Regulations and to frustrate the original intention of Parliament.” It also considered that the effect of not adopting the contested legislation would have been to allow the societies “to retain a windfall.” It is easy to see why the Court did not accept that the societies were suffering any unjust interference with their claims. Indeed, the Court declined to rule directly that these claims were “possessions” for the purposes of Article 1 of Protocol 1. By reason of the changeover of payments, there was a gap. The societies would have been allowed to retain amounts for tax that they had collected from their clients.
The Attorney General argued that the decision of the majority of this Court in Murphy supported by the reasoning of the European Court in National Provincial Building Society –v- United Kingdom provides justification for the Bill. In this connection, it is submitted that the patients received the services for which they were charged and that their right to free provision of the services was statutory and not constitutional. The Court does not find these arguments persuasive. At the time of their provision, the patients were entitled to have the services free of charge and the charges were imposed and money demanded unlawfully and contrary to the express provisions of the statute. The situation of the building societies in National Provincial Building Society is much more analogous to the case of Minister for Social, Community and Family Affairs –v- Scanlon [2001] IR 64 decided by this Court. The building societies could never, as a matter of justice, have been considered entitled to retain monies they had deducted for tax from their clients and not paid over to the Revenue. The Court, therefore, rejects the arguments of the Attorney General insofar as they are based on both Murphy and National Provincial Building Society.
Property Rights: Articles 40 and 43
Articles 40.3.2 and 43
The Court now turns to what it considers to be the core issues which arise from the submissions of counsel concerning the constitutionality of the Bill. These concern the nature of the existing rights of persons entitled to recover charges unlawfully paid and the justification of the State for delimiting those rights. In their submissions counsel assigned by the Court also argued that such legislation would be specially objectionable insofar as it purported to interfere with vested rights. They cited the judgment of O’Higgins C.J. in Hamilton v Hamilton [1982] IR 466 at 474:
“Retrospective legislation, since it necessarily affects vested rights, has always been regarded as being prima facie unjust.”
Henchy, Griffin and Hederman JJ. agreed with the conclusions of the Chief Justice. Henchy J. added at p. 484:
“The judicial authorities (which are mentioned in the judgment which the Chief Justice has just delivered) make clear that, because there is a presumption that a statute does not intend to operate unfairly, unjustly or oppressively by trenching on rights or obligations lawfully acquired or created before the statute came into force, it should be construed as prospective in its application and not retrospective, unless there is a clear and unambiguous intention to the contrary expressed, or necessarily implied, in the statute, or unless the change effected by the statute is purely procedural”.
These two statements concern only the approach of the common law to the interpretation of retrospective legislation. The topic was further considered by this Court in Minister for Social Welfare –v- Scanlon [2001] 1 IR 64. Fennelly J., speaking for a unanimous Court, referred to the need “to segregate the two issues, namely the correct approach to the interpretation of statutes with potential retrospective effect in accordance with common law principles and the interpretation of provisions with such effect in the light of the Constitution.” In the case of this Reference, it is not suggested that any particular issue of interpretation arises. It is acknowledged that subsection (5) has the retrospective effect of deeming the past collection and payment of charges to be lawful and that that will deprive the affected persons of the right to restitution. Indeed, that is its acknowledged purpose. The relevance of the Hamilton case is, therefore, its repetition of the presumption that retrospective legislation which affects vested rights is prima facie unjust. The relevance of the Scanlon case is that retrospective legislation is not necessarily unjust. In that case, the defendant had received disability benefits over a number of years, although he had been working during that time. At the time of payment of the benefits, there was no provision for their recovery. An amendment was introduced with retrospective effect. The constitutionality of the provision was not challenged, but it was submitted that it should, to be compatible with the Constitution, not be construed so as to have retrospective effect. This submission was rejected, except in one respect, on the ground that there was no identifiable constitutional right to retain benefits which had been wrongly obtained.
The nature of the property right enjoyed by patients affected by subsection (5) has already been analysed as being a chose in action. It is now necessary to consider the constitutional provisions protecting the rights of private property.
Under the heading, “Private Property” the Constitution contains the following Article:
Article 43
1. 1° The State acknowledges that man, in virtue of his rational being, has the natural right, antecedent to positive law, to the private ownership of external goods.
2° The State accordingly guarantees to pass no law attempting to abolish the right of private ownership or the general right to transfer, bequeath, and inherit property.
2. 1° The State recognises, however, that the exercise of the rights mentioned in the foregoing provisions of this Article ought, in civil society, to be regulated by the principles of social justice.
2° The State, accordingly, may as occasion requires delimit by law the exercise of the said rights with a view to reconciling their exercise with the exigencies of the common good.
Article 40, s. 3 of the Constitution provides:
3. 1° The State guarantees in its laws to respect, and, as far as practicable, by its laws to defend and vindicate the personal rights of the citizen.
2° The State shall, in particular, by its laws protect as best it may from unjust attack and, in the case of injustice done, vindicate the life, person, good name, and property rights of every citizen.
As was stated by Keane C.J. delivering the judgment of the Court in Re Article 26 of the Constitution and the Planning and Development Bill, 1999 [2000] 2 IR 321 at p. 347, “the interpretation of these Articles and, in particular, the analysis of the relationship between Article 40.3.2 and Article 43 have not been free from difficulty”. A comprehensive discussion of evolving jurisprudence on this subject is contained in Hogan and Whyte J. M. Kelly: The Irish Constitution (4th Ed., Lexis Nexis Butterworths, Dublin, 2004, pp. 1978 to 1993). The learned authors conclude, at p. 1993, that “when considering constitutional protection of property rights, these Articles mutually inform each other”. Keane C.J., in the judgment mentioned, recalled, firstly, the statement of O’Higgins C.J. delivering the judgment of the Court in Blake –v- Attorney General [1982] IR 117 at p. 135:
“Article 43 is headed by the words “private property.” It defines… the attitude of the State to the concept of the private ownership of external goods and contains the State’s acknowledgement that a natural right to such exists, antecedent to positive law, and that the State will not attempt to abolish this right or the associated right to transfer, bequeath and inherit property. The Article does, however, recognise that the State “may as occasion requires delimit by law the exercise of the said rights with a view to reconciling their exercise with the exigencies of the common good.” It is an Article which prohibits the abolition of private property as an institution, but at the same time permits, in particular circumstances, the regulation of the exercise of that right and of the general right to transfer, bequeath and inherit property. In short, it is an Article directed to the State and to its attitude to these rights, which are declared to be antecedent to positive law. It does not deal with a citizen’s right to a particular item of property, such as controlled premises. Such rights are dealt with in Article 40 under the heading “personal rights” and are specifically designated among the personal rights of citizens. Under Article 40 the State is bound, in its laws, to respect and as far as practicable to defend and vindicate the personal rights of citizens.
There exists, therefore, a double protection for the property rights of a citizen. As far as he is concerned, the State cannot abolish or attempt to abolish the right of private ownership as an institution or the general right to transfer, bequeath and inherit property. In addition, he has the further protection under Article 40 as to the exercise by him of his own property rights in particular items of property”.
Keane C.J. proceeded, however, to suggest some modification of the approach adopted in Blake. He said, at p. 348:
It is clear, particularly when the later decisions of the court are examined, that this approach cannot now be adopted without at least some reservations. It is no doubt the case that the individual citizen who challenges the constitutional validity of legislation which purports to delimit or regulate the property rights undertakes the burden of establishing that the legislation in question constitutes an unjust attack on those rights within the meaning of Article 40. It is also possible to envisage an extreme case in which the Oireachtas by some form of attainder legislation purported to confiscate the property of an individual citizen without any social justification whatever. In such a case, no inquiry would be called for as to whether the legislation also conformed to the requirements of Article 43. The challenge typically arises, however, as it has done here, in circumstances where the State contends that the legislation is required by the exigencies of the common good. In such cases, it is inevitable that there will be an inquiry as to whether, objectively viewed, it could be regarded as so required and as to whether the restrictions or delimitations effected of the property rights of individual citizens (including the plaintiff in cases other than references under Article 26) are reasonably proportionate to the ends sought to be achieved.
That the provisions of Article 43 are relevant to the inquiry undertaken by the courts where they are considering a challenge to the constitutionality of legislation on the ground that it constitutes an unjust attack on the property rights of the citizen within the meaning of Article 40 was made clear in the subsequent decision of this court in Dreher –v- Irish Land Commission [1984] ILRM 94, which it will be necessary to consider at a later point.
In the case of Dreher –v- Irish Land Commission, mentioned in that passage, Walsh J., with the agreement of the other members of the Court, had expressed the opinion that “any State action that is authorised by Article 43 of the Constitution and conforms to that Article cannot by definition be unjust for the purposes of Article 40.3.2”. This statement was followed in several later cases, notably O’Callaghan –v- Commissioners of Public Works, [1985] ILRM 364 and Madigan –v- Attorney General [1986] ILRM 136 at p. 161. It remains a correct statement of the close relationship between the two Articles. It remains, of course, necessary to consider how the Court should interpret Article 43 and, in particular how it should exercise its own power of review of legislation, which the Oireachtas has enacted in accordance with its own views of necessary regulation of property rights in the interests of social justice and the exigencies of the common good.
In Tuohy –v- Courtney, [1994] 3 IR 1 this Court was concerned with a challenge to the constitutionality of a provision of the Statute of Limitations, 1957, proceeding, without necessarily deciding the point, on the basis that the right to litigate was a property right protected by the Constitution. It had been agreed that, “in legislating for time limits on the bringing of actions, [the Oireachtas] is essentially engaged in a balancing of constitutional rights and duties”. Finlay C.J., delivering the judgment of the Court, laid down a principle of general application when dealing with such legislation. He said, at p. 47:
“What has to be balanced is the constitutional right of the plaintiff to litigate against two other contesting rights or duties, firstly, the constitutional right of the defendant in his property to be protected against unjust or burdensome claims and, secondly, the interest of the public constituting an interest or requirement of the common good which is involved in the avoidance of stale or delayed claims.
The Court is satisfied that in a challenge to the constitutional validity of any statute in the enactment of which the Oireachtas has been engaged in such a balancing function, the role of the courts is not to impose their view of the correct or desirable balance in substitution for the view of the legislature as displayed in their legislation but rather to determine from an objective stance whether the balance contained in the impugned legislation is so contrary to reason and fairness as to constitute an unjust attack on some individual’s constitutional rights.”
The foregoing statement was followed by this Court in Iarnród Éireann & Anor –v- Ireland and the Attorney General [1996] 3 IR 321, a case concerning a challenge to the constitutionality of certain provisions of the Civil Liability Act, 1961, regarding concurrent wrongdoers, though the judgment of the Court is silent as to whether the rights of litigants in that context constituted property rights. Keane J., as he then was, had treated them as property rights in his High Court judgment. The same passage from Tuohy was applied by this Court in White –v- Dublin City Council [2004] 2 ILRM 509, also a case dealing with the constitutionality of a limitation period. Once more, the Court found it unnecessary, following the view of Finlay C.J., to determine whether the right to litigate constituted a property right. Implicit in the statement that there would be no material difference in the constitutional protection provided is the assumption that the Oireachtas may have been involved in deciding whether the principles of social justice required the regulation of the exercise of the property rights in question and whether their delimitation was therefore justified by the exigencies of the common good. Denham J., delivering the judgment of the Court, stated, at p. 531, that “striking a balance in the form of a limitation period is quintessentially a matter for the judgment of the legislator”. She went on to state that the passage from the judgment of Finlay C.J. “in effect restates………the presumption of constitutionality enjoyed by all acts of the Oireachtas”.
An important part of the analysis of justification for interference with constitutional property rights is the question of compensation. Reference has already been made to the statement of Keane C.J. in Re Article 26 of the Constitution and the Planning and Development Bill, 1999 [2000] 2 IR 321 (at p. 352):
“There can be no doubt that a person who is compulsorily deprived of his or her property in the interests of the common good should normally be fully compensated at a level equivalent to at least the market value of the acquired property.”
That Reference concerned a form of taking of property with a measure of compensation. There have been cases where the Court has upheld interference with property rights without compensation. In O’Callaghan –v- Commissioners of Public Works [1985] ILRM 364 the Court did not consider that the absence of any provision for compensation for the making of a preservation order in respect of a public monument on the plaintiff’ s lands rendered the relevant legislation repugnant to the Constitution. The Court, in the judgment of O’Higgins C.J., pointed out, at p. 367, that “the order does not deprive the owner of his ownership nor of his rights to use the monument in any manner not inconsistent with it preservation”. It also pointed out that the plaintiff was aware of the limitation at the time of purchase and that what was involved was “a requirement of what should be regarded as the common duty of all citizens”. In Dreher –v- Irish Land Commission [1984] ILRM 94 this Court rejected a challenge to provisions of the Land Acts to the effect that compensation for land compulsorily acquired under that legislation was to be paid only in the form of land bonds, the value of which was liable to fluctuation. An examination of the facts of that case shows that, as the Court pointed out, the plaintiff received full compensation for the value of his land, that the bonds were issued at and intended to be kept at par and that, on the facts of the case, they had traded above par at a time when the plaintiff could have disposed of them. For these reasons, Keane C.J., in the judgment of the Court in Re Article 26 of the Constitution and the Planning and Development Bill, 1999, at p. 351, expressed the view that Dreher “should be regarded as one essentially decided on its own special facts”. Against these cases may be set the decision of this Court in Electricity Supply Board –v- Gormley [1985] IR 129, where a statutory power of the plaintiff to erect masts to carry electricity power lines across the defendant’s lands, though not a power to lop trees and branches, without payment of compensation, was held to be unconstitutional. In a number of cases also, there has been discussion of the appropriate level of compensation: see Blake –v- Attorney General [1982] IR 117 In Re Article 26 of the Constitution and the Housing (Private Rented Dwellings) Bill, 1981 [1983] IR 181; Dreher, already discussed. From a consideration of these and other decided cases, it is clear that, where an Act of the Oireachtas interferes with a property right, the presence or absence of compensation is generally a material consideration when deciding whether that interference is justified pursuant to Article 43 or whether it constitutes an “unjust attack” on those rights. In practice, substantial encroachment on rights, without compensation, will rarely be justified.
For the purposes of its consideration of whether the Bill or any provision thereof is repugnant to the Constitution, the Court is satisfied that the correct approach is: firstly, to examine the nature of the property rights at issue; secondly, to consider whether the Bill consists of a regulation of those rights in accordance with principles of social justice and whether the Bill is required so as to delimit those rights in accordance with the exigencies of the common good; thirdly, in the light of its conclusions on these issues, to consider whether the Bill constitutes an unjust attack on those property rights.
According to the text of Article 43, the private ownership of external goods is a “natural right”. For that reason, it is “antecedent to positive law”. It inheres in man, “by virtue of his rational being.” The former Supreme Court, in Buckley –v- Attorney General [1950] IR 67 recalled that these rights had “been the subject of philosophical discussion for many centuries”. But it did say that the constitutional guarantee meant that “man by virtue, and as an attribute of, his human personality is so entitled to such a right that no positive law is competent to deprive him of it……” The right to the ownership of property has a moral quality which is intimately related to the humanity of each individual. It is also one of the pillars of the free and democratic society established under the Constitution. Owners of property must, however, in exercising their rights respect the rights of other members of society. Article 43.2.1, therefore, declares that these rights “ought, in civil society, to be regulated by the principles of social justice”. The property of persons of modest means must necessarily, in accordance with those principles, be deserving of particular protection, since any abridgement of the rights of such persons will normally be proportionately more severe in its effects.
For the reasons already given, the Court is satisfied that patients upon whom charges for in-patient services were unlawfully imposed from and after 1976 and, a fortiori, after 2001, and who paid those charges were entitled, as of right, to recover those charges. The actions for recovery could be based upon the law of restitution already discussed. They might be based on the modern approach to the recovery of money paid under a mistake of law (see Rogers –v- Louth County Council [1981] IR 265). The action might take the simple form of a claim for the repayment of money had and received to the use of the plaintiff or a claim in equity for a declaration that certain monies were held in trust. The form of the action is immaterial for present purposes. What is clear is that the patients had a property right consisting of a right of action to recover the monies. While the Attorney General has not seriously contested the existence of this form of right, counsel on his behalf have advanced some arguments designed to cast doubt upon it. Firstly, it was said that the right was a mere statutory right, the right to the free provision of services, a right susceptible of change or amendment. This, in the view of the Court, does not address the nature of the property right. Because the statutory right existed, patients were entitled to receive the relevant services free of charge. This right persisted so long as s. 53(1) of the Act of 1970 remained unchanged, as it did. Secondly, it was said that the patients had, in fact, received the services. The same response is appropriate. The services should have been supplied on the express legal basis that they were free of charge. The charging was unlawful. Thirdly, it is said that, in many cases, the beneficiaries of any recovery will be the relatives, often the distant relatives of the patients, who, in many cases are now deceased. This argument does not address the legal character of a property right. The right in question is assignable and will devolve on the estates of deceased persons. In any event, the Bill does not seek to establish any scheme for distinguishing between meritorious and unmeritorious beneficiaries of recoupment claims. All are treated in the same way.
In contrast to the approach taken by counsel for the Attorney General, as outlined in the preceding paragraph, counsel assigned by the Court relied on the views expressed by the European Court of Human Rights in Pressos Compania SA –v- Belgium (1995) 21 EHRR 301. That case concerned retrospective Belgian legislation concerning claims for damages by a number of ship-owners as a result of alleged negligence of Belgian pilots. The Belgian Government claimed that, as a result of a decision of the Cour de Cassation, it found itself exposed to enormous unforeseen damages claims. Belgium adopted a law exempting the Belgian Government from liability for the negligence of pilots, with retrospective effect. The applicants had existing claims. The Court held that the interference with existing claims to be “a deprivation of property within the meaning……” of Article 1 of Protocol 1. It noted that the justification was “the need to protect the State’s financial interests……” Dealing with the proportionality of the interference, the Court stated that “the taking of property without payment of an amount reasonably related to its value will normally constitute a disproportionate interference and a total lack of compensation can be considered justifiable……only in exceptional circumstances.” (para. 38). Responding to reliance on financial considerations, it stated:
“Such considerations could not justify legislating with retrospective effect with the aim and consequence of depriving the applicants of their claim for compensation.
Such a fundamental interference with the applicants’ rights is inconsistent with preserving a fair balance between the interests at stake.”
While the Court does not rely on that case for its final conclusions, and although it has its own particular facts giving rise to issues to be resolved under the terms of the European Convention on Human Rights, it is nonetheless illustrative of the issues which can arise for courts when retrospective legislation affects the legal status of previous transactions.
As regards the issues arising in this Reference it bears repetition that the property rights to be abrogated in their entirety by the Bill belong to the most vulnerable members of society. While the extension of full eligibility to all aged seventy or over, regardless of means, in 2001 means that a number will not be of limited means, the reality is that a great many will still be among the poorest in our society. Whatever exceptions may exist, it is an undoubted fact that the Bill will affect very many people who are old, or poor or disabled, mentally or physically, or in many cases all of these. As already stated, persons so situated will almost certainly have had little or no capacity to understand their rights under the legislation or to protest at the unlawfulness of the charges. All of these elements will be relevant to a consideration of the grounds upon which the Attorney General justifies the legislation.
Although counsel for the Attorney General on occasions referred to the Bill as curative the Court does not consider that the Bill is simply a curative or remedial statute, insofar as its retrospective provisions are concerned. Curative statutes are those measures that will either ratify prior official conduct or make a remedial adjustment in an administrative scheme. They often are the result of previous court decisions which overrule certain administrative conduct. In these situations the legislature is simply correcting the statutory flaws or filling a gap in statutory authority which had not been considered necessary and which the Oireachtas could always have adopted. Curative statutes, in the classical sense, remove unintended flaws in existing legislation and help to give full effect to the legislative intent behind the initial or original legislation. It goes without saying that any such legislation must be in conformity with the Constitution but its purely curative or remedial nature is a factor to be taken into account in the consideration of any constitutional issue.
The situation which the Bill addresses is quite different. The original intent of the legislature is to be found in s. 53 of the Act of 1970, which expressly conferred on persons of full eligibility under the Health Acts the right to in-patient services without charge. In deeming the charges imposed contrary to the provisions of that section as lawful the Bill is not simply curative, since it goes directly contrary to the legislative intent of the initial legislation. It thereby seeks to alter the legal effect of completed transactions which had been conferred on them by an Act of the Oireachtas. This inevitably gives rise to considerations that differ from the simply curative or remedial legislation of the kind referred to above, particularly in respect of the rights of persons to recover monies paid for charges which were imposed on transactions contrary to the express intent of the Oireachtas.
Furthermore, for this reason it should be emphasised that it would be entirely inaccurate to characterise the recovery by persons of the monies which they paid in respect of the unlawful charges as anything in the nature of a windfall for such persons with a valid claim.
Justification Expense to the State
It is admittedly not possible to establish definitively the factual background to the legislation, although this judgment seeks to identify certain matters of fact on the basis of common sense. The basic proposition advanced on behalf of the State is clear and simple. It is that the cost to the exchequer of repaying all patients in the relevant category will be very great. It was not contended on behalf of the State that it is faced with a serious financial crisis. It was stated that, going back as far as 1976, some 275,000 patients would have received the relevant services. Taking into account the right of the State to limit its liability by reliance on the Statute of Limitations, it was said that the figure to be repaid for the past six years could be of the order of €500 million. Counsel assigned by the Court pointed out that the total budget for the health services for the current year is of the order of €11 billion, which was not contradicted by counsel for the Attorney General.
The Court accepts that, upon discovery of an unforeseen liability to reimburse patients in the relevant categories, the State may find itself faced with a significant additional financial burden. However, while it is the opinion of the Court that the financial burden on the State of making the relevant repayments is a substantial one, it is by no means clear that it can be described as anything like catastrophic or indeed that it is beyond the means of the State to make provision for this liability within the scope of normal budgetary management.
Counsel for the Attorney General has submitted, in reliance especially on Article 43 of the Constitution and of the judgment of this Court in Tuohy –v- Courtney [1994] 3 IR 1 that the Oireachtas, in enacting the Bill, was engaged in balancing complex economic and social considerations, a matter classically within legislative rather than judicial competence. Accordingly, the Court should be extremely slow to intervene. It should be recalled also that Keane C.J. wrote to similar effect in Re Article 26 of the Constitution and the Planning and Development Bill, 1999 [2000] 2 IR 321 where, speaking of the presumption of constitutionality, he said at p. 358:
“It is peculiarly the province of the Oireachtas to seek to reconcile in this area the conflicting rights of different sections of society and that clearly places a heavy onus on those who assert that the manner in which they have sought to reconcile those conflicting rights is in breach of the guarantee of equality.”
In considering that argument, it is of prime importance to consider the extent of the interference with property rights proposed by the Bill. What it proposes is the extinction of the rights in question. All patients, from whom charges have been unlawfully collected, regardless of their circumstances, are simply to be deprived of any right to recover sums lawfully due to them. No relief against this effect is provided, discretionary or otherwise, in the Bill, though the Court was informed of the discretionary decision of the State to make ex gratia payments of €2,000 each to some 20,000 people. The absence of compensation is, in reality, the object of the legislation. This aspect of the case law is not, therefore, particularly relevant, except to show the exceptional nature of these aspects of the Bill.
In the view of the Court, such legislation cannot be regarded as “regulating” the exercise of property rights. It is straining the meaning of the reference in Article 43.2.1 of the Constitution to the “principles of social justice” to extend it to the expropriation of property solely in the financial interests of the State. This is not at all the type of balancing legislation which was in contemplation in Tuohy –v- Courtney, White –v- Dublin City Council [2004] 2 ILRM 509 or Iarnród Éireann & Anor –v- Ireland and the Attorney General [1996] 3 IR 321. All of these cases concerned legislation designed to reconcile the interests of different categories of people in society. The case of the Planning Bill, 1999 might be thought to present an alternative case of such reconciliation. However, that Bill was not designed to protect the financial interests of the State, but rather to provide land for housing for social reasons. Furthermore, there was provision for compensation. The Court does not exclude the possibility that, in certain cases, the delimitation of property rights may be undertaken in the interests of general public policy. However, the invocation of these Articles in circumstances where rights such as arise in this case, rights very largely of persons of modest means, are to be extinguished in the sole interests of the State’s finances would require extraordinary circumstances.
Moreover, it is evident from the terms of the Bill and the submissions on behalf of the Attorney General, that the persons who are affected by its retrospective provision are being required by the Bill to bear the consequential burden of the unlawful charges in order to protect the exchequer generally, or the health budget in particular, from that burden. The rationale for so doing, according to the submissions of the Attorney General, is that these were persons who actually benefited from the services in question. The Court does not accept this as a rational basis for requiring that class of person to bear the burden of the ultimate cost of the charges which were unlawfully imposed on them. Those persons are in no different position from all other persons who enjoyed a whole range of free statutory services or benefits under the Health Acts. The fact that they received a service to which they were freely entitled by statute is not a distinguishing feature. Their only distinguishing feature is that they were unlawfully charged for the service.
It is, in effect, for this reason that their property rights are being abrogated.
Where a statutory measure abrogates a property right, as this Bill does, and the State seeks to justify it by reference to the interests of the common good or those of general public policy involving matters of finance alone, such a measure, if capable of justification, could only be justified as an objective imperative for the purpose of avoiding an extreme financial crisis or a fundamental disequilibrium in public finances.
Having regard to the terms of the Bill and taking into account all of the submissions of counsel, nothing has emerged in the course of the Reference from which the Court could conclude that the abrogation of the property rights in question is an imperative for the avoidance of an extreme financial crisis or a fundamental disequilibrium in public finances.
For the reasons set out above the Court is satisfied that subsection (5) and the associated provisions of the Bill constitute an abrogation of property rights and an unjust attack on them contrary to the provisions of the Constitution and in particular Articles 43 and 40.3.2..
Having regard to the conclusion expressed in the immediately preceding paragraph, it is unnecessary to consider any argument based on the principle of proportionality. It is also not necessary to consider the arguments related to Article 40.1 and Article 34. The Court does not consider that any issue arises concerning subsection (8) of s. 53 of the Act of 1970 as inserted by s. 1(b) of the Bill.
Decision of the Court pursuant to Article 26
The prospective provisions of the Bill, that is to say those provisions which require the imposition of charges for in-patient services to be provided in the future, concern matters for which the Oireachtas has power to legislate. The power to regulate and impose such charges delegated to the Minister by s. 1(a) of the Bill falls within the principles and policies of the Bill and, in the view of the Court, is compatible with Article 15.2.1 of the Constitution. Having regard to the maximum level of charges and the discretionary provision concerning the imposition of charges in individual cases, the Court does not consider that those charges, either in principle or in themselves, could be considered an infringement of any constitutional right.
The retrospective provisions of the Bill are those which abrogate the right of persons, otherwise entitled to do so, to recover monies for charges unlawfully imposed upon them in the past for the provision of certain in-patient services.
The practice which gave rise to the imposition of such charges was not one which was followed simply in the absence of lawful authority but was one which was contrary to the express provisions of s. 53(1) of the Health Act, 1970 by virtue of which the Oireachtas has decreed that the in-patient services in question be provided without charge. The recovery of such monies thus unlawfully charged by those entitled to do so could not properly be characterised as a ‘windfall’.
The Court considers that the right to recover monies for the charges thus imposed is a property right of the persons concerned which is protected by Articles 43 and 40.3.2 of the Constitution from, inter alia, unjust attack by the State.
The Constitution, in protecting property rights, does not encompass only property rights which are of great value. It protects such rights even when they are of modest value and in particular, as in this case, where the persons affected are among the more vulnerable sections of society and might more readily be exposed to the risk of unjust attack.
For the reasons expressed in this judgment the Court has decided that the retrospective provisions of the Bill contained in s. 1(b) which provide for the insertion of subsections (5), (6) and (7), and subsection (11) insofar as it defines “relevant charge”, in s. 53 of the Act of 1970, are repugnant to the Constitution and in particular Articles 43 and 40.3.2 thereof.
Bank of Ireland Trust Services Ltd. v. Revenue Commissioners
[2003] IEHC 59 (15 July 2003)
JUDGMENT of Mr. Justice Kelly delivered on the 15th day of July, 2003.
Introduction
On the 29th November, 2002 I decided that the plaintiff was entitled to interest upon repayments of Value Added Tax (VAT) made to it by the defendants. The VAT repaid amounted to IR£1,750,000. Prior to the hearing in October, 2002 which led to that judgment the parties agreed that if interest was payable to the plaintiff the determination of the rate of such interest and the quantification of the amount payable should be left over for another day. That day came on the 27th June, 2003 and this is my judgment on the matter.
Background
The background to the case is set forth in detail in my judgment of the 29th November, 2002. A short summary of the salient facts will suffice for the purposes of this ruling.
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The plaintiff has for many years been involved in the acquisition, development and management of a portfolio of properties. It was registered for VAT. It made the usual bi-monthly returns in respect of its VAT liability. VAT was paid by or refunded to the plaintiff on foot of those returns between 1981 and 1997.
On the 22nd March, 1991 the plaintiff gave written notice of a claim for repayment of such tax for the period 1st November, 1986 to 30th April, 1989. The defendants refused repayment.
An appeal was taken to the Appeal Commissioners. The appeal was brought in respect of a single two month period but it was a test case the result of which was to govern liability for all of the relevant periods in respect of which a claim was made. The claim for refund was ultimately made retrospective to 1981 being the maximum period permissible having regard to the limitation period for such claims.
The plaintiff lost before the Appeal Commissioners. A case was stated to the High Court where it lost again. An appeal was taken to the Supreme Court. On the 16th December, 1997 it reversed the decision of the High Court. On foot of the Supreme Court determination IR£1.75 million VAT was repaid. That occurred in January, 1999.
It was agreed that all VAT periods from the 1st March, 1981 should be treated as having been under appeal. Repayment of VAT was made on that basis.
The plaintiff contended that it was entitled to interest on the VAT overpaid on two separate bases. First, it alleged that it was entitled to interest pursuant to the relevant legislation. I found in its favour in this regard. Having considered the relevant legislation I said:
“I am of opinion that the correct construction to be given to these statutory provisions is that all of the provisions of the Income Tax Acts relating to the payment of tax in accordance with the determination of the Appeal Commissioners where that decision is under appeal by way of case stated are necessarily imported into the VAT
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legislation. If that be correct then if a claim for repayment of VAT is determined by the High Court or on appeal by the Supreme Court in favour of the taxpayer, the position in relation to a VAT appeal is the same as that which applies to an income tax appeal. It follows that the amount of VAT overpaid falls to be treated as if it were income tax overpaid and to be refunded with such interest, if any, as the court may allow.”
Later in the judgment I held that
“The plaintiff is entitled to interest in accordance with the provisions of s. 941(9) of the Taxes Consolidation Act, 1997 “.
I held that a specific provision had been made by statute for the payment of interest.
I went on to consider the second basis upon which the plaintiff claimed interest. It did so by reference to the doctrine of unjust enrichment. I held that the doctrine applied in the context of taxes paid where they ought not to have been and refunds not made when they should have been. I held that the plaintiff would be entitled to recover under the general law of restitution and unjust enrichment if the payment of interest was not specifically provided for pursuant to the statutory provisions. Strictly speaking it was not necessary for me to consider this second limb of the plaintiff’s case. I did so for the sake of completeness lest my decision on the first part of the claim might have been considered erroneous in the event of an appeal to the Supreme Court.
My judgment of the 29th November, 2002 was not appealed. Such being so, the plaintiff re-entered the case for the purposes of having the amount of interest assessed by the court.
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The Claim
It is common case that the task which I have been asked to undertake is that contemplated in s.941(9)(a) of the Taxes Consolidation Act, 1997. The plaintiff does not seek to have me determine a claim under the general law of restitution or unjust enrichment. Indeed it would be difficult to see how it could do so having regard to my finding that the payment of interest is specifically provided for by statute.
The plaintiff does contend however, that in exercising the statutory discretion I ought to bear in mind the legal principles which inform the doctrine of restitution and unjust enrichment. This, it contends, is so because of the nature of the statutory jurisdiction. I now turn to a consideration of the statutory provision.
The Statutory Provision
S.941(9) (insofar as it is relevant) provides as follows:
“(9) Notwithstanding that a case has been required to be stated or is pending, income tax or, as the case may be, corporation tax shall be paid in accordance with the determination of the Appeal Commissioners; but if the amount of the assessment is altered by the order or judgment of the Supreme Court or the High Court, then-
(a) if too much tax has been paid, the amount overpaid shall be refunded with such interest, if any, as the Court may allow,…”
It is clear that the statute leaves it to the court to decide if any interest is to be paid in a particular case and if so how much.
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This is in marked contrast to other statutory provisions which are to be found in the taxes legislation. There specific rates of interest are prescribed. The legislature chose not to do so in the present case.
Is Interest Payable?
The defendants contend that this is the first question which has to be answered. They concede however that it must be answered in favour of the plaintiff. That is so having regard to the earlier determination made by the court and the facts of the case. I can therefore immediately turn to the question of the rate of interest which is to be applicable and the period of time for which interest should be paid.
What Rate of Interest Applies?
No fewer than seven different rates of interest were identified as being capable of being resorted to by the court in carrying out its statutory task. Five of these consist of simple interest and two of compound interest. For the period March 1982 to January 1999 they range in terms of their value (on the plaintiff’s calculations) from as little as £913,384 to £3,332.660. That upper limit goes to £5,912,998 if a particular compound rate were held to be applicable in the circumstances of this case to May 2003. It is clear therefore that there is an enormous range of values involved depending upon the rate of interest which the court may ultimately choose.
Previous Jurisprudence
There is only a small number of cases where an issue such as the present one has been considered by the High or Supreme Court.
The first is Texaco Ireland Limited v. Murphy [1992] 4 ITR 91. In the second judgment of the Supreme Court of the 15th May, 1992 McCarthy J. had to consider the
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provisions of s.428(9) of the 1967 Income Tax Act which is in the same terms as s.941(9) of the Taxes Consolidation Act, 1997. On the topic of interest he said
“The enabling section, s.428(9) of the 1967 Act clearly leaves the calculation of interest, if any, within the discretion of the Court. This is in marked contrast with the statutory obligation on the Revenue to pay interest at the rate in force in respect of late payments or overpayments under s.30 of the 1976 Act, where the rate of interest, itself free of tax, is fixed by the statute. In accordance with the established jurisprudence of the Court as outlined in the judgment on the substantive issue, as to the construction of a taxing statute and referring to the decisions in McGrath v McDermott [1988] 1.R. 258, Revenue Commissioners v. Doorley [1933] 1. R. 750 and Inspector of Taxes v Kiernan [1981] I.R. 117, in my view the calculation of interest here does not fall within F.A. 1976 s.30(4) or I.T.A. 1967 s.550(1). As to a claim based upon various bank rates, I would not wish to shut out the possibility in an appropriate case of proving actual loss of interest sustained; this carries the hazard that investigation might show that the relevant investment would itself have had a negative return. In my view, in accordance with the consequential decision in McGrath’s case the Court should apply the rate under the Courts Act as applicable throughout the relevant period”.
The next case where the topic was considered is O’Rourke v. Revenue Commissioners [1996] I.T.R. 321. It is the judgment of Keane J. (as he then was) delivered on 18th December, 1996 that is relevant for present purposes. I have already referred to this case in my first judgment. It involved the entitlement of a tax payer who had tax wrongly deducted under the PAYE system to a repayment together with interest. There the judge said
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“As to the rate of interest applicable, Mr. McDowell conceded that the rate under FA 1976 s.30 was not appropriate. I am also satisfied that the overdraft rate applicable in respect of current accounts at the relevant times would not be appropriate: as Mr. O’Keeffe pointed out, that rate would be significantly higher, particularly in recent years, than the rates payable to lenders in respect of money on deposit. At the same time, to apply the deposit rate would clearly result in an injustice to the plaintiff. I find myself, in the result, in the same position as the Supreme Court in Texaco Ireland v. Murphy (No. 3), where the Court had a discretion as to how the interest should be calculated. It seems to me that no distinction can usefully be drawn between a case such as the present, where the repayment arises under common law, and the case such as Texaco (Ireland) Ltd. where it arose by virtue of statute. I will, accordingly, follow the same course as that adopted by McCarthy J., with the concurrence of the other members of the court, in that case and hold that the appropriate rate of interest in the present case is that ruling at the relevant times under the Courts Act, 1981 s.22(7) in respect of the period prior to the enactment of that provision, the rate ruling under the Debtors (Ireland) Act 1840 s. 26. ”
These two decisions demonstrate that when the superior courts were in the past called upon to adjudicate upon a matter similar to that in suit the opted to apply the rate of interest prescribed under the Courts Act, 1981. It is not immediately apparent why that course was chosen in either case, but chosen it was.
The Rates
The five rates of simple interest which have been identified are as follows –
(1) Interest at the rate prescribed under the Taxes Acts.
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(2) Interest at the rate prescribed under the Courts Act.
(3) Bank interest rate.
(4) Performance rate.
(5) Gilt rate.
Two rates of compound interest were identified. They were bank interest rate and performance rate.
The plaintiffs claim ‘performance rate’ regardless of whether simple or compound interest is permitted. I should therefore say a word about it and what it entails. The other types of interest require no explanation.
The plaintiff in this case is a unit trust fund. A unit trust fund has a performance. The performance rate is claimed by reference to the increase or decrease in value of the portfolio of properties. It is argued that that is the appropriate rate which should be applicable because that is what the plaintiff would have done with the monies in question if it had been provided with them from the time that they ought to have been repaid.
In my view I would not be justified in awarding interest (whether simple or compound) by reference to the performance rate which is claimed. The legislative provision under which I am operating provides for the payment of “interest”. I am not involved in assessing damages. The interest which is permissible under s.941 (9) arises in respect of a specified sum of overpaid tax. It is referrable to a sum certain which constitutes the principal which in this case was the overpayment of £1.75 million VAT. To accede to the plaintiff’s request would not be to carry out the operation of granting interest on a sum certain, but rather would be treating the principal as a constantly changing one reflecting the accretions of capital to the unit trust. The performance rate is not in my view a rate of interest at all. It involves applying interest to a measure of the increase in the value of a fund over the years in question. Indeed not merely the increase would be taken into account but also the capital appreciation. In
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my view I would not be justified in applying the ‘performance rate’ under any heading of interest.
I have also concluded that I would not be justified in awarding any form of compound interest. None of the statutory provisions which allow for interest to be awarded, whether under the taxes legislation or the Courts Act, provide for other than simple interest. I am of the view that if the legislature wished the court to have discretion to award a different species of interest in a case such as this it would have specifically said so. It did not. I therefore interpret “interest” in this context as having no different meaning to that when used in other statutory provisions, that is to say, simple interest.
In these circumstances I am reduced in choice to one of four rates. The difference in money terms between them is small. They range from £913,830 (Taxes Act rate) to £945,436 (Courts Act rate).
In my view the Taxes Act rate is not applicable. If the legislature wished me to apply that rate it could have said so but did not. This appears to be the approach adopted by McCarthy J. in the Texaco case.
I am of opinion that I should follow the course which was adopted by both the Supreme Court and the High Court in the two cases mentioned and apply the Courts Act rate. In so concluding I bear in mind that the Courts Act rate is the interest rate prescribed by statute for litigants who come to court in order to prosecute their claims. It applies to all litigants and has the merit of certainty and equality of treatment for all litigants of which the plaintiff is one. I therefore propose to award interest pursuant to the provisions of the Courts Act, 1981.
For How Long Should Interest Be Permitted?
The £l.75 million was repaid in January, 1999. The money had been overpaid since March, 1982. It was not until 22nd March, 1991 that the plaintiff gave written notice of a claim for repayment of the tax.
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The plaintiff contends that it should be entitled to interest from the time of the first payment in March, 1982. The defendants contend that interest should be payable only from the time that notification of a claim for repayment was given in March, 1991. The plaintiffs say that they are entitled to interest from the time that the first overpayment was made.
The plaintiff relies upon O’Rourke’s case in support of its contention. In my view there is a substantial difference between the facts in O’Rourke’s case and the present one. Mr O’Rourke had tax deducted under the PAYE system and was in employment as a branch manager in a social welfare office. The plaintiff in the present case is a sophisticated financial house managing a large fund and operating in the commercial market. It is not unreasonable to assume that it has had available to it, at all times a range of professional services and advisers. In the present case it paid its VAT on the basis of an existing practice and was apparently quite content to do so for nine years. When counsel for the plaintiff spoke of its monies being unlawfully taken from it, such a contention must be seen in the context of these facts. I do not think that the case is comparable on its facts to O’Rourke’s case.
In the exercise of my discretion I have come to the conclusion that a just result is achieved if the plaintiff is permitted interest from the time when it first gave notice of a claim for repayment of such tax. Accordingly, on the basis of the calculations put before me I will allow interest at the Courts Act rate from March, 1991 to January, 1999. On the defendant’s figure this amounts to £724,473. I should note that the defendant’s figure is slightly in excess of the plaintiff’s calculation under this heading but I propose to allow the higher sum.
There will therefore be judgment for the Euro equivalent of IR£724,473.
Harris -v- Quigley & anor
[2005] IESC 79
JUDGMENT of Mr. Justice Geoghegan delivered the 1st December 2005
There is a net issue of law to be determined in this appeal namely, whether in the event of an appeal by the Revenue Commissioners to the High Court by way of case stated from a determination of the Appeal Commissioners under the Tax Acts, any overpayment of tax, (which in this case meant overretention of tax) resulting from the determination of the Appeal Commissioners, ought to be refunded to the taxpayer or on the other hand whether the Revenue Commissioners are entitled to retain the overpaid tax pending the outcome of the case stated to the High Court and any appeal therefrom to the Supreme Court. If the first of these options represents the correct legal position, the taxpayer fully concedes that if, as a consequence of the decision of the High Court or on appeal, the decision of the Supreme Court, he is found to be liable for more tax than had been payable pursuant to the determination of the Appeal Commissioners, he is obliged to repay that additional tax with interest as though it was arrears of tax. If the second of the two options represents the correct legal position, the appellants representing the Revenue Commissioners concede that in the event of the determination of the Appeal Commissioners being upheld the overpaid tax must, at that stage, be paid back to the taxpayer with interest as provided for in the Tax Acts.
As to which position is correct is entirely a matter of construction of the relevant statutory provisions.
The background facts are not in dispute. The respondent’s claim is for a refund of €9,136,776.59 being a refund of tax for the year ended the 5th April, 2001, the period ended 31st December, 2001 and the year ended 31st December, 2002 and arising out of a determination made on the 29th October, 2004 by the Appeal Commissioner in a tax appeal taken by the respondent. The respondent is a taxpayer subject to Schedule E, who has his tax deducted at source. The respondent had become a partner in a limited partnership arising out of which he claimed to become entitled to the benefit of certain capital allowances. The partnership had been established under the laws of the Cook Islands and was for the purpose of carrying on the trade of operating high class luxury yachts and undertaking hospitality events and similar activities. The claim for capital allowances arose out of major refurbishment work which was carried out on a motor yacht which had been purchased by the partnership. Under Irish tax law there are restrictions placed on the tax relief available to limited partners. These restrictions, however, apply only to “limited partners” within the meaning of section 1,013(1)(d) of the Taxes Consolidation Act, 1997. The Appeal Commissioner determined that the respondent was not a “limited partner” within the meaning of that statutory provision and was not, therefore, subject to the restrictions. The effect of the Appeal Commissioner’s determination was that the Revenue Commissioners had retained excessive sums as tax amounting to €9,136,776.59. Immediately following the determination by the Appeal Commissioners the Revenue Commissioners gave notice of an appeal by way of case stated. It is of some interest to note that the terms of the case stated have not even yet received final approval from the Appeal Commissioners. Quite apart from any inevitable delay in the drafting of a case stated and the approval by the Appeal Commissioners there would then follow the inevitable delays in obtaining a hearing in the High Court. If a point of law is considered by the Revenue Commissioners to be of such importance as to warrant an appeal by way of case stated to the High Court, it is highly likely that no matter what the outcome in the High Court there will be a further appeal to the Supreme Court. In each court there would be likely to be a reserved judgment and, therefore, if ultimately, the Appeal Commissioners’ determination was upheld, the respondent would have been without the benefit of the monies which ought to have been repaid for a very considerable period. Such hardship would not, necessarily, be remedied by ultimate repayment with interest.
It is against this background that it is necessary to interpret the relevant statutory provisions.
The first of these is section 933(4) of the Taxes Consolidation Act, 1997. That subsection reads as follows:
“All appeals against assessments to income tax or corporation tax shall be heard and determined by the Appeal Commissioners, and their determination on any such appeal shall be final and conclusive, unless the person assessed requires that that person’s appeal shall be reheard under section 942 or unless under the Tax Acts a case is required to be stated for the opinion of the High Court.”
The reference to section 942 is a reference to appeals to the Circuit Court a matter which does not arise except inferentially in this case. The purpose of the subsection is to make clear that in the absence of either an appeal to the Circuit Court or an appeal by way of case stated to the High Court, the determination by the Appeal Commissioners becomes “final and conclusive”. It is clear that in the event of such appeal or case stated the Appeal Commissioners’ determination is not “final and conclusive”. This is something heavily relied on by the appellants in resisting the claim for the refund. I will return in due course to this aspect of the appellants’ argument. It is appropriate, however, to signpost at this stage that because a determination by the Appeal Commissioners has not become “final and conclusive” it does not necessarily follow that the claim for the refund is ill-founded. A High Court judgment is necessarily not final and conclusive if an appeal from it is pending before the Supreme Court but that does not mean that in the meantime the judgment of the High Court is not a lawful judgment capable of being executed upon. It is only if the High Court or the Supreme Court grants a stay of execution on the judgment that the execution process can be prevented notwithstanding the pendency of an appeal. Even then the High Court judgment remains lawful until overruled. I am not suggesting that the High Court analogy to which I have just referred could be directly relevant to the interpretation of a tax statutory provision but it does illustrate the conceptual normality, at least, of a determination by a lower tribunal being valid and enforceable notwithstanding an intended or actual appeal from it.
I now turn to the statutory provision which, in my view, is most relevant to the outcome of this appeal. That is section 934(6) of the same Act of 1997. The subsection reads as follows:
“Where an appeal is determined by the Appeal Commissioners, the inspector or other officer shall give effect to the Appeal Commissioners’ determination and thereupon, if the determination is that the assessment is to stand or is to be amended, the assessment or the amended assessment, as the case may be, shall have the same force and effect as if it were an assessment in respect of which no notice of appeal had been given.”
Section 934 is one of a group of sections dealing with appeals and contained in Part 40 of the Act of 1997. It is obvious on a reading of these sections that the wording of each section has been carefully thought out and for the most part each contingency and necessary exception has been expressly provided for. It is the appellants’ case, however, that subsection (6) cited above has no application where an appeal is brought to the Circuit Court or on a case stated to the High Court. The learned trial judge in the High Court (Gilligan J.) seems to have taken the same view even though on other grounds he held in favour of the respondent. While, as far as possible, a taxing statute should be interpreted in the same way as any other statute and should not be interpreted, if at all possible, as to create an absurdity, nevertheless there is a countervailing principle that where there is an ambiguity a taxing statute will be interpreted in favour of the taxpayer. I do not consider that this court would be justified in implying into subsection (6) words of exception which are not there, covering appeals to the Circuit Court or cases stated to the High Court.
Counsel for the appellants, Mr. McDonald, partly relied on what was the practice apparently for many years. That practice appears to be that if there is a case stated the inspector does nothing under section 934(6). As the correctness of that view has never been argued, I do not think that any particular force can be attached to the existence of such a practice. The stronger argument put forward by Mr. McDonald is based on the last words of the subsection, that is to say “shall have the same force and effect as if it were an assessment in respect of which no notice of appeal had been given”. This is a reference back to the provisions of section 933(6)(a) of the same Act. That provision reads as follows:
“In default of notice of appeal by a person to whom notice of assessment has been given, the assessment made on that person shall be final and conclusive.”
The appellants argue that since under section 934(6) the assessment based on the Appeal Commissioners’ determination is to have the same force and effect as if it were an assessment in respect of which no notice of appeal had been given then that means, if the respondent’s argument is correct, that even in a case where a case stated is brought to the High Court, the assessment based on the determination of the Appeal Commissioners would become “final and conclusive”. Counsel for the appellants, however, point out that that cannot be right because it would contradict section 933(4) which as I have already demonstrated expressly provides that only Appeal Commissioners’ determinations unappealed shall be final and conclusive.
I do not think that this apparent discrepancy justifies the step of wholly ignoring section 934(6) in a case where no appeal is brought to the Circuit Court or no case stated to the High Court. Every attempt must be made to interpret subsection (6) in such a way as to remove such inconsistency.
In endeavouring to carry out this exercise, I would first point out that subsection (6) of section 934 does not provide that the relevant assessment shall be deemed to be an assessment as provided for in section 933(6). Rather it provides that it “shall have the same force and effect as if it were an assessment in respect of which no notice of appeal had been given.” It is quite clear from that wording that not only is it not an assessment in respect of which no notice of appeal has been given but it is not deemed to be such an assessment. The words “as if” make that clear. Having regard to section 933(4) one characteristic which such relevant assessment does not have is that it is “final and conclusive”. But in my view, that does not mean that it is not a lawful assessment with the effect that in so far as the Revenue Commissioners may be retaining monies over and above what has been lawfully determined by the Appeal Commissioners such monies are not required to be refunded. Furthermore, I would interpret subsection (6) as meaning that irrespective of whether there is an appeal or not, the assessment, if necessary, should be amended to correspond with the determination even if that is not the practice at the moment. If the decision of the High Court or on appeal the Supreme Court differs from the determination of the Appeal Commissioners in a way that renders the revised assessment to be incorrect that eventuality is expressly provided for by section 941(9) of the 1997 Act. That particular subsection reads as follows:
“(9) Notwithstanding that a case has been required to be stated or is pending, income tax or, as the case may be, corporation tax shall be paid in accordance with the determination of the Appeal Commissioners; but if the amount of the assessment is altered by the order or judgment of the Supreme Court or the High Court, then –
(a) if too much tax has been paid, the amount overpaid shall be refunded with interest in accordance with the provisions of section 865 A or
(b) if too little tax has been paid, the amount unpaid shall be deemed to be arrears of tax (except in so far as any penalty is incurred on account of arrears) and shall be paid and recovered accordingly.”
It would appear, therefore, that if as a consequence of the decision of the High Court or the Supreme Court the revised assessment following on the determination of the Appeal Commissioners short-changes the Revenue Commissioners, the balance is deemed to be arrears of tax and recovered accordingly.
Given these express provisions for adjustments following on the determination of the case stated and similar provisions following an appeal to the Circuit Court, I see no particular reason why section 934(6) should be given the interpretation put on it by the appellants, or more accurately, I see no reason why the submission of the appellant that subsection (6) is for some reason or other to be wholly ignored if there is either a case stated or an appeal, should be accepted. In this connection, it may be of some significance that there is no equivalent of section 934(6) requiring the inspector or other officer to give effect to a High Court or Supreme Court determination or indeed to a Circuit Court determination. It is particularly of interest that there is no such provision in relation to a so called Circuit Court appeal because although it is normal to refer to an “appeal” to the Circuit Court in tax matters, strictly speaking that is a misnomer. Under the provisions of section 942 of the 1997 Act the function of the Circuit Court is to conduct a rehearing of the appeal to the Appeal Commissioners. In point of form and in point of law it is not strictly speaking an appeal from the Appeal Commissioners. Rather it is a rehearing of the same appeal. That is all the more reason why a subsection equivalent to section 934(6) would have been expected to have been inserted in, say, section 942 if the appellants’ submissions are correct.
In each instance, however, the scheme of the Act in so far as it relates to alterations of assessments by the High Court, the Supreme Court or the Circuit Court in favour of the Revenue Commissioners as distinct from similar alterations by the Appeal Commissioners is that the balance due to the Revenue Commissioners is recoverable as arrears of tax. More accurately, it is deemed to be arrears of tax.
Subsection (9) of section 941 is relevant to this appeal in three respects. First of all, it is relevant in relation to the scheme by which the Revenue Commissioners recover additional tax due to them when they are successful on a case stated, as I have already indicated. Under paragraph (b) the amount unpaid “shall be deemed to be arrears of tax …and shall be paid and recovered accordingly”. The second respect in which it is relevant is with regard to a major argument being put forward by the appellants and which was more or less accepted by the learned High Court judge that as there is a statutory provision for refunding overpayments following on the determination of a case stated, that provision represents a comprehensive statutory scheme for refunding and there cannot be an obligation to refund pending the hearing of a case stated. The latter conclusion, as the argument runs, is based on the fact that the statute expressly provides for a refund in one situation and is completely silent in relation to the other and that that must be taken to be a statutory intention that there be no refund pending an appeal. By the same token, it is argued that there cannot be a common law claim for refunding pending the determination of a case stated as the common law allegedly does not come into play if there is in place a statutory scheme. I will be returning to this second aspect of relevance of subsection (9) in due course. In relation to the first aspect of relevance, I think it appropriate to complete the picture by citing section 943(1) of the same Act. It reads as follows:
“Section 941 shall, subject to this section, apply to a determination given by a judge pursuant to section 942 in the like manner as it applies to a determination by the Appeal Commissioners, and any case stated by a judge pursuant to section 941 shall set out the facts, the determination of the Appeal Commissioners and the determination of the judge.”
It follows that the provisions of subsection (9) of section 941 as cited above applies to the outcome of a so called Circuit Court appeal. If the result of the Circuit Court appeal is that the Revenue Commissioners are owed more money that extra tax due is deemed to be arrears of tax and must be paid and recovered accordingly.
I have not mentioned up to now (apart from citing the subsection) the third aspect of relevance to this appeal of section 941(9). As will have been noted, the subsection provides that notwithstanding that a case stated has been required, income tax or corporation tax, as the case might be must be paid in accordance with the determination of the Appeal Commissioners but if the amount of assessment is altered by the order or judgment of the Supreme Court or the High Court then if too much tax has been paid the overpayment shall be refunded with interest. The interest provisions are now governed by section 865A of the 1997 Act as inserted by the Taxes Act, 2003. Counsel for the respondent argues that this obligation on the part of a taxpayer who as a consequence of a determination by the Appeal Commissioners is liable for additional tax to pay that tax forthwith notwithstanding that he may be bringing a case stated to the High Court is discriminatory against the taxpayer if there is no reciprocal obligation on the part of the Revenue Commissioners to refund excessive tax retained by them in the event of a Schedule E taxpayer being successful on an appeal to the Appeal Commissioners and in circumstances where the Revenue Commissioners are requiring a case stated. Such perceived discrimination lends weight, in the view of counsel for the respondents, to the argument that a refund pending the determination of a case stated must be made by the Revenue Commissioners. Otherwise the respective obligations are quite unequal. I find myself in agreement with that submission.
There is a second type of discrimination flowing from the interpretation of the statutory provisions put forward on behalf of the appellants. That is a discrimination between two categories of taxpayers. If, for instance, a successful appeal was brought to the Appeal Commissioners by a Schedule D taxpayer he or she would not be required to pay all the tax originally assessed pending the outcome of a case stated sought by him. On the other hand, if the argument of the appellants is correct a Schedule E taxpayer i.e. a PAYE taxpayer is not entitled to the use of the extra money pending the hearing of the case stated because according to their argument the Revenue Commissioners are entitled to retain all the original tax deducted. Again, this rather unfair result militates, in my view, against interpreting the statutory scheme in the way suggested by the appellants.
On the other hand, by a letter of the 26th November, 2004 to the solicitors for the respondents the Revenue solicitor put forward the following argument which was repeated in the written and oral submissions.
“The obligation on an inspector to amend an assessment pursuant to section 934(6) TCA, only applies where such determination is final and conclusive. There is no obligation under section 934(6) TCA to amend the assessment where there is an appeal from the Appeal Commissioners’ decision, since to amend the assessment in accordance with that subsection would give it the same force and effect as if it were ‘an assessment in respect of which no appeal had been given’. Such an assessment would render an appeal to the Circuit Court under section 942 or an appeal by way of case stated under section 941 redundant.”
I have effectively dealt with this argument earlier on in this judgment when I was treating of the question of whether section 934(6) applied to a determination of the Appeal Commissioners in circumstances where there was to be a case stated. For the reasons which I have already indicated, I would disagree with that submission and there is nothing further which I can usefully add. In my view, it is correctly responded to at paragraph 20 of the written submissions of the respondent where it is pointed out:
“The appeal is no more redundant than it would be in the case of a taxpayer who loses before the Appeal Commissioners and is obliged to pay the tax.”
In summary, therefore, I am satisfied that it would be entirely wrong to insert words into section 934(6) which are not there. In arguing the contrary on this appeal, counsel for the appellants primarily rely on the unreported judgments of this court delivered by Murray J. (as he then was) and by myself and with which Hardiman J. concurred in the Criminal Assets Bureau v. McDonnell, judgments delivered 20th December, 2000. In dealing with some problems of construction in that case in relation to the process of appeals to the Appeal Commissioners the court resolved those problems by applying what Murray J. described as a “cohesive and schematic interpretation”. However, the problems in that case were quite different than the problems in this case. That was a case where a notice of appeal was served in time but was refused by the inspector. The issue of whether the appeal ought to have been refused by the inspector or not came before the Appeal Commissioners but the taxpayer did not turn up. The court took the view that there was no “default of notice of appeal” so as to render the assessment final and conclusive. There had in fact been a notice of appeal. On a very literal interpretation of the sections, the court might have arrived at a different conclusion but it declined to do so. The literal interpretation was, in the view of the court, unnecessary and would have been unfair and oppressive towards the taxpayer. I do not think that there is any analogy with this appeal. Having sat on the court, I am entirely satisfied that it was never intended that the McDonnell case could possibly be regarded as an authority for the view that a broad schematic interpretation must always be given to tax statutes.
It is clear that section 934(6) contains no exception for situations where there is either a case stated or an appeal to the Circuit Court. It would be quite wrong for this court to read the subsection as though it included those exceptions or to ignore the subsection altogether if there is a case stated. It must follow from that that the retention of the controversial monies by the Revenue Commissioners pending the determination of the case stated is not lawful.
It is now necessary to consider does that mean that the appellant has a right of action to recover the monies. In this connection, I am in agreement with the appellants on one point. In the same letter of the 26th November, 2004 referred to above Ms. Frances Cooke, Revenue Solicitor, stated the following:
“The direction in section 941(9) TCA that ‘tax shall be paid in accordance with the determination of the Appeal Commissioners’ is not a direction that tax shall be repaid. Repayment only arises in accordance with the provisions of section 941(9)(a) if the amount of the assessment is altered by order or judgment of the Supreme Court or the High Court.”
The solicitors for the respondent argued otherwise in a letter of reply of the same date. In my view, however, the Revenue Solicitor was correct. It would appear to me that section 941(9) does not lend itself to that interpretation. There is no other statutory provision entitling the respondent to claim the refund at this stage. The question, therefore, arises does he have such an action at common law. But before I consider that question, I must first deal with the submission that the issue of a common law action does not arise at all once there is a comprehensive statutory scheme. Having regard to the modern case law in England and Ireland relating to restitution, I cannot accept that submission. The absence of a specific statutory provision providing for recoupment in a quite different situation from the situation covered by section 941(9) cannot give rise to a submission that there is a statutory prohibition on recoupment.
It follows therefore that the question of whether there is a common law action does arise. Until some recent case law it was assumed that money paid under a mistake of law was not recoverable by action subject to the exception of money exacted colore officii as explained by Kenny J. in his High Court judgment in Dolan v. Neligan [1967] I.R. 247. The law of restitution however has been reconsidered and revised in a number of common law jurisdictions and in particular by the House of Lords in England in Woolwich Building Society v. Inland Revenue Commissioners [1993] AC 70. The principles in Woolwich have been further elaborated upon by the House of Lords in Kleinwort Benson Limited v. Lincoln City Council [1999] 2 AC 349 and by the Court of Appeal in a judgment of Jonathan Parker LJ in Deutsche Morgan Grenfell Group plc v. Inland Revenue Commissioners [2005] EWCA Civ 78. I do not find it necessary to review in detail any of these English cases as I am quite satisfied that the principles laid down by Keane J. (as he then was) in the High Court case of O’Rourke v. The Revenue Commissioners [1996] 2 I.R. 1 correctly represent Irish law. I am equally satisfied that if the O’Rourke case is correct, which I believe it is, it governs this case and that even if the law as apparently laid down in Woolwich has the limited application suggested by Jonathan Parker LJ, that limited application is relevant to this appeal. I, therefore, propose to concentrate on the judgment of Keane J.
The facts of O’Rourke v. The Revenue Commissioners were that as a consequence of another High Court decision it was discovered that the plaintiff had, for some years, been wrongly treated as a Schedule E taxpayer when he was in fact taxable under Schedule D. As a consequence, an excessive amount of tax had been retained. Under an informal agreement the plaintiff was recouped in respect of the overpayment but the Revenue Commissioners refused to pay interest. The statutory preconditions to any statutory claim to interest did not apply to the facts of the case and as a consequence the plaintiff’s entitlement to interest, if at all, arose at common law. Keane J. allowed the claim on the basis that he agreed with the majority view of the House of Lords in the Woolwich Building Society case. He relied particularly on passages in the speeches of Lord Goff of Chievely, Lord Browne-Wilkinson and Lord Slynn of Hadley. Each of these passages is set out in the judgment but for the purposes of this appeal I think it is sufficient to cite the passage of Lord Goff which reads as follows:
“I would, therefore, hold that money paid by a citizen to a public authority in the form of taxes or other levies paid pursuant to an ultra vires demand by the authority is prima facie recoverable by the citizen as of right. As at present advised, I incline to the opinion that this principle should extend to embrace cases in which the tax or other levy has been wrongly exacted by the public authority, not because the demand was ultra vires but for other reasons, for example, because the authority has misconstrued a relevant statute or regulation. It is not, however, necessary to decide the point in the present case, and in any event cases of this kind are generally the subject of a statutory regime which legislates for the circumstances in which money so paid either must or may be repaid. Nor do I think it necessary to consider for the purposes of the present case to what extent the common law may provide the public authority with a defence to a claim for the repayment of monies so paid: though for the reasons I have already given I do not consider the principle of recovery should be inapplicable simply because the citizen has paid the money under a mistake of law.”
After setting out the three passages Keane J. commented as follows:
“It seems to me that, if the law laid down in those passages is also the law applicable in Ireland, the tax overpaid by the plaintiff was recoverable as a matter of right. It would follow automatically from that conclusion that the plaintiff was entitled to interest so as to compensate him for the unjust enrichment effected at his expense by the defendants. I do not consider that any meaningful distinction can be drawn in this context between tax paid under a regulation subsequently found ultra vires, as in the Woolwich case, and excessive amounts paid by a taxpayer because the taxing authority has misconstrued a relevant statute or regulation, which is the position. Lord Goff in the Woolwich case while not deciding the point indicated his view that it was not a significant distinction and Lord Jauncey, in the course of his dissenting opinion, dismissed it as a distinction without a difference. I would respectfully agree with those views. Similarly, while the fact that the plaintiff permitted the sums to be deducted from his payments without protest is clearly of significance in another context, dealt with at a later point in this judgment, it is clear from the passages which I have already cited that the majority decision in the Woolwich case was also founded on a wider principle i.e. that the money was paid for no consideration.”
After going on to consider whether the claim might be defeated by Murphy v. The Attorney General [1982] I.R. 241 and having concluded that having regard in particular to the limited scope of the payments it was not, Keane J. went on to approve the law as laid down in Woolwich and the obiter dicta of Lord Goff cited above.
An attempt has been made in this case on behalf of the appellants to draw a distinction between a claim for refund of tax and a claim for interest. I cannot see any validity in the distinction provided that the statute when properly interpreted does not exclude a common law claim. I have already expressed the view that it does not. I also entirely agree with Keane J. that no logical distinction can be made between tax deducted pursuant to an ultra vires regulation and tax deducted due to a mistake of interpretation on the part of the Revenue Commissioners of the relevant statute law. In this case although the determination of the Appeal Commissioner was not final and conclusive within the meaning of the Tax Acts, it was a lawful determination which then had to be put into effect by the inspector. The retention of the excessive tax as found by the Appeal Commissioner was unlawful and was tantamount to an unjust enrichment of the Revenue Commissioners at least for the period between the determination of the Appeal Commissioner and the ultimate determination of the case stated.
I believe that in the absence of a provision in the Tax Acts precluding a refund pending the determination of the case stated the appellants are bound to effect such refund. Although my views are somewhat different from those of the learned High Court judge, I agree with his conclusion and I would dismiss the appeal.
Dolan v. Neligan
[1967] IR 247
O’Dalaigh C.J. :
11 May
I have read the judgment which Mr. Justice Walsh will deliver and I agree with it.
HAUGH J. :
I also agree.
WALSH J. :
The question to be decided in this appeal is whether the plaintiff can recover £19,193 10s. 1d. which he was overcharged for customs duty on goods he imported into the country. The goods were consignments of perry sold under the trade name of “Babycham” for which the plaintiff was the sole agent in this country. The perry was manufactured in England. At the time of importation the customs authorities assessed the duty chargeable under two heads, namely, that chargeable in respect of perry and a spirit duty chargeable in respect of the spirit content of the perry in excess of 13%. The plaintiff had submitted to the customs authorities (correctly, as subsequently transpired) that the duty was chargeable under one heading only, namely, as perry. The customs authorities, however, stood by their decision in the matter and the plaintiff paid the sums demanded because, he said, otherwise he could not have the goods cleared for distribution. Subsequent to the payment by the plaintiff and the clearance of the goods, a decision of the late Mr. Justice Dixon in a case between the same parties and dealing with consignments of Babycham, which were not the subject matter of the present proceedings, settled once and for all that duty was chargeable only under the heading of perry and that the customs charge on the other basis was without legal authority.
The plaintiff has claimed the return of the overpayments, first, on the ground that as the moneys were charged without any legal authority they cannot be retained by the customs authorities; secondly, that the moneys were extracted from him colore officii and wrongly extracted; and, thirdly, that the moneys were paid under mistake of fact and are therefore recoverablethe mistake of fact being the mistaken belief (claimed to have been induced by the customs authorities) that spirit duty was payable on Baby-cham, whereas in fact it was not.
The defendant’s case is, first, that the moneys were paid under a mistake of law and are therefore not recoverable, and were paid freely and voluntarily by the plaintiff. It was also contended on behalf of the defendant that there is no legal authority authorising the repayment of these moneys without a court order, and that in any event, even if there was legal authority to repay the moneys, they would not be paid because, it was suggested, the plaintiff’s claim is without merit. It was also submitted on behalf of the customs authorities that a particular statutory remedy is provided for dealing with a case of this nature in s. 30 of the Customs Consolidation Act, 1876, and that, as the plaintiff made no effort to invoke the procedure there set down, no other remedy is open to him for the recovery of the moneys. In the High Court the case was decided against the plaintiff on this last ground.
The plaintiff, in his notice of appeal to this Court, claims that the trial judge was wrong in holding that ss. 30 and 31 of the Act of 1876 were in absolute substitution for any other right the plaintiff might have to recover the moneys, and that the learned judge was wrong in holding that a dispute within the meaning of s. 30 of the Act, which is the necessary foundation for the application of the section, existed at any material time. It was also claimed that the learned trial judge was wrong in holding that the duty paid by the plaintiff was paid under mistake of law, as distinct from mistake of fact. The plaintiff also claims that the learned trial judge was wrong in holding that the Act of 1876 does not contain any provision authorising the repayment of overcharges of customs duty, and contends that such authority is expressly conferred by s. 25 of that Act.
The defendant also appealed against part of the judgment of the learned judge in the High Court. This appeal was grounded on the claim that the learned judge had misdirected himself in law in holding that, were it not for s. 30 of the Act of 1876, the plaintiff would have been entitled to recover the moneys as money had and received to his use; and in holding that the overpayment was solely due to the error made by the customs authorities; and in holding that the payment was made under duress; and in holding that, were it not for s. 30 of the Act of 1876, the plaintiff could have recovered the moneys on the grounds that they were paid under a mistake of law caused “entirely by the defendant.”In the course of his judgment the learned trial judge said “. . . were it not for the problem presented by s. 30 of the Customs Consolidation Act, 1876, I would unhesitatingly hold that the plaintiff was entitled to recover the sum claimed as money had and received by the defendant to his use”and also “The payment of spirits duty on Babycham was caused by the error made by the Revenue Commissioners: they were solely responsible for the mistake and they ought to have known better. If the arguments based on s. 30 of the Customs Consolidation Act, 1876, are left out of consideration, the plaintiff would, in my opinion, be entitled to recover the moneys overpaid by him because they were paid under a mistake of law caused entirely by the defendant.”
The plaintiff, in his notice of appeal, has also claimed that the learned trial judge was wrong in permitting the defendant to rely upon ss. 30 and 31 of the Act of 1876 as they had not been pleaded, and that the learned judge had misconstrued the meaning and effect of the sections. The notice of appeal also claimed that the sections in question did not apply in a case where the importer of goods paid the full amount of the customs duty demanded and did not avail of”the enabling provisions of the said sections” by depositing the same and recovering not only the excess of customs duty overpaid but also interest thereon as provided in the sections. It was also claimed by the plaintiff that the judge was wrong in holding that the sections applied where the claimant did not in fact resort to them. It was also claimed that the judge was wrong in holding that these sections provided an exclusive remedy for the recovery of the overpaid duty.
It will thus be seen that the grounds of appeal raised by both parties throw open for consideration on this appeal every aspect of the case presented in the High Court and, in particular, underline the importance of ss. 30 and 31 of the Act of 1876 to the plaintiff’s claim. It is, therefore, appropriate to consider the effect of these sections at the outset.
At the time of the importation there was clearly a dispute between the plaintiff and the customs authorities as to the proper rate of duty payable upon the goods. There is no definition of the word “dispute” in s. 30 of the Act of 1876, or in any other section of the customs code, which would be relevant in the present case to give that word anything other than its ordinary meaning. No particular formalities are required to institute a dispute within the meaning of the section and it is quite clear from the words of the section itself that a dispute may embrace, under the heading of the proper rate of duty, questions of the actual value of goods in question as well as the proper heading of charge. In my view a dispute may be either a non-agreement or an actual conflict ad idem and there is ample evidence in the present case to show that the parties were certainly not in agreement as to the rate of duty payable and that the opposing contentions of the parties at the time of the entry of the goods constituted a dispute within the meaning of the section.
The section provides that if any dispute shall arise as to the proper rate of duty “the importer or consignee, or his agent, shall deposit in the hands of the collector of the Customs” the amount of the duty demanded by the collector. The word “shall” in this context does not mean that when there is a dispute the money demanded by the collector must be paid to him. However, it does mean that, if the importer wishes to have his goods permitted to enter at the port and delivered to him and to avail of the procedure laid down by s. 30, he must pay the sum demanded to the collector even though he does not agree with, or he disputes, the contentions of the collector as to the proper rate of duty. In such event he may pay the money in accordance with the provisions of s. 30 if he wishes to avail of the procedures which are open to him under ss. 30 and 31 and to obtain the benefit of the interest payment which is available under s. 31, provided he brings his proceedings in accordance with the provisions of s. 30 and within the time limited by the sections. In that event he will have deposited in the hands of the collector of the customs the duty demanded on the understanding that it is being deposited in accordance with, and for the purposes of, ss. 30 and 31 of the Act of 1876. Alternatively the importer, however much he may disagree with the views of the collector upon the rate of duty payable, may reluctantly and unwillingly pay without any reference to sect. 30. It is, in my view, clear that every payment of duty made by an importer, who does not agree that the rate of duty being charged or demanded is the correct rate, is not to be regarded as invoking the provisions of ss. 30 and 31 of the Act unless it is clear that the payment is by way of deposit under sect. 30. Unless the payment is in the form of a deposit under s. 30 the importer, even if he can recover the duty, cannot claim the benefit of the interest payment available under sect. 31. Sect. 30 has an advantage for both the importer and the customs authorities in the sense that in the event of the duty being recoverable under s. 31 it would carry interest from the date of the deposit; and from the point of view of the customs authorities, the return of the duty with the interest shall be accepted by the importer in satisfaction of all claims in respect of the importation of the goods and the duty payable thereon and of all or any damages and expenses incident thereto.
The important question, however, is whether s. 30 provides the only method by which the importer, who is in dispute with the customs authorities about the rate of duty payable, can recover the duty in dispute if his contention is correct. In short, does s. 30 mean that any overpayment of duty is irrecoverable unless paid by way of deposit under sect. 30? Unless it is clear that the statute makes this not merely an exclusive but also a sole procedure, the importer may seek the recovery of his money by any of the procedures which would be open to him if s. 30 had not been enacted.
Sect. 123 of the Act for the General Regulation of the Customs, 1825, and s. 126 of the Act for the General Regulation of the Customs, 1833, and s. 137 of the Act for the General Regulation of the Customs, 1845, all provided that, although any customs duty should have been overpaid or although after any customs duty should have been charged and paid it should appear or be judicially established that it had been charged under an erroneous construction of the law, it should not be lawful to return the overcharge after the expiration of three years from the date of payment. These statutory provisions acknowledged the right to return the overpayments made whether by reason of errors of fact or law. The next statutory provision, namely ss. 29 and 30 of the Customs Consolidation Act, 1853, introduced another, and in my opinion an additional, approach. Sect. 29 of the Act of 1853 commenced with the phrase “If any dispute shall arise as to the proper rate of duty payable . . .” In my view the area of dispute in that was not confined to errors in construction of the law but would have embraced any other matter upon which there was a dispute, be it construction of law or a question of fact which would relate to the proper rate of duty payable. It was also provided in ss. 29 and 30 of the Act of 1853, in terms similar to ss. 30 and 31 of the Act of 1876, that the amount of duty demanded might be deposited in the hands of the collector and that, if no action were brought within the three months limited, the duty so deposited was to be retained and applied as if it had been originally paid and received as duty due and payable on the goods; the money having been “deemed and taken to be the proper duty payable in respect of such goods” by s. 29 of the Act of 1853.
In my view the provisions of the Act of 1853 already referred to, by deeming such deposits to be the proper duty payable in respect of the goods in the event of no proceedings as provided in the sections, effectively closed the question of whether the sums demanded were or were not the proper duty payable in respect of such goods. The same meaning is to be attached to the identical provision in s. 30 of the Act of 1876. That means in respect of cases on which s. 30 of the Act of 1876 operates that, in the event of there being no litigation provided for in the section, it is no longer contestable that the duty paid is the proper duty payable. However, for the reasons I have already given earlier in this judgment, that legal consequence would follow only where s. 30 of the Act of 1876 is invoked and does not automatically attach to any sum paid for duty whether or not there is a dispute as to the proper rate of duty payable.
In the present case the plaintiff did not invoke s. 30 of the Act of 1876 in respect of the goods which are the subject matter of this appeal, nor did he ever purport to deposit in the hands of the defendant, as collector, the duty demanded for the purpose of s. 30 of that Act. The fact that the plaintiff paid the duty did not in itself automatically invoke the provisions of s. 30 or apply the provisions of s. 30 to his case.
When the provisions of the Acts of 1825, 1833 and 1845 were repealed they were not replaced by any expressed statutory prohibition upon the return of duties overpaid or overcharged. On the contrary s. 25 of the Act of 1853 (later replaced by s. 25 of the Act of 1876) provided “. . . as it is expedient to extend the period within which overpayments of duty may be returned, . . .” and authorised the customs authorities to return any money which had been overpaid as duties of customs at any time within six years after such overpayment on its being proved to their satisfaction that the same was overpaid in error. The words of s. 25 of the Act of 1876 do not exclude from the term “error” an erroneous construction of the law or any other kind of error. There can be no doubt that in the present case the duties in question were overpaid because of an erroneous construction of the law by the customs authorities. In my opinion the customs authorities have statutory power under s. 25 of the Act of 1876 to repay the moneys in question if they are satisfied that the duties were overpaid in error.
It was submitted by counsel on behalf of the defendant that s. 25 of the Act of 1876 applies only to cases where the importer had made some error in his calculations in the course of submitting his goods for assessment of customs duties. Undoubtedly s. 25 would cover such a case but there is nothing in the wording of the section which gives it such a restricted meaning. It is not difficult to envisage cases where several different types of error may arise in addition to a simple error of calculation which might be made as to quantity or weight. It is possible that in a case where duty may be chargeable on the spirit content of some goods that an error may be made by the importer in his statement of the content, not an error based on any calculations which he has made but an error perhaps made on the basis of wrong information supplied to him. I have already expressed the opinion that the term “error” without qualification, as it appears in s. 25 of the Act of 1876, is a good deal wider than the term “erroneous construction of the law” used in the earlier statutes. Furthermore, there is nothing in the section which confines its operation to an error moving from the importer only or to exclude its operation in a case where the error was made by the customs authorities.
Sect. 25 of the Act of 1876 uses the words “are hereby authorised to return any money which shall have been overpaid as duties of customs, at any time within six years after such overpayment, on its being proved to their satisfaction that the same was overpaid in error; but no such return shall be allowed unless the claim for the same shall have been made and established within such period of six years.” The first thing to note about the section is that it clearly establishes a period of limitation. Secondly, it envisages a claim being made to the Revenue Commissioners for the return of moneys overpaid in error. Thirdly, it imposed upon the Commissioners the duty of adjudicating upon the claim. With regard to the latter point, the words “being proved to their satisfaction” import a judicial approach to this question on the part of the Commissioners and impose the obligation to decide the matter by objective standards and to act judicially.
The duties in the present case were paid between the years 1956 and 1959 and the formal claim for the return of the sum overpaid was made on the 27th November, 1959. The documents do not disclose that any reply to this demand was ever received but a letter of the 5th January, 1960, referred to the demand of the 27th November, 1959, and a reminder of the 22nd December, 1959, and stated that”the matter is under consideration. A further communication will be issued to you at an early date.” No further communication was issued. There is no direct evidence as to whether or not the Revenue Commissioners ever directed their minds to a consideration of this matter under the terms of s. 25 of the Act of 1876 but in the light of the circumstances of this particular case I do not think that would be of any great materiality. It is beyond dispute, and had been so found by the judgment of the High Court given by Mr. Justice Dixon, already referred to, that the customs authorities were in error in charging the duty which they did. It would, therefore, have been impossible for the Revenue Commissioners, upon consideration of the matter, to arrive at any different conclusion as the point in question had already been decided by Mr. Justice Dixon before the demand of the 27th November, 1959. The matter must, therefore, be treated as one in which it has been proved to the satisfaction of the Revenue Commissioners that the customs authorities were in error and that the duties were charged and paid on foot of that error. The fact that the plaintiff never accepted the view of the customs authorities that their contention was the correct one but nevertheless paid the duty does not mean that the money was not paid in error. Money paid on foot of an erroneous charge is money paid in error.
For the reasons already given I am of opinion that the Revenue Commissioners are entitled by virtue of the provisions of s. 25 of the Act of 1876 to return to the plaintiff the amount of duty overpaid. Unlike the provisions of s. 30 of the Act of 1876, there is no provision in s. 25 of that Act which states that any such overpayment shall be deemed to be the proper duty payable. On behalf of the customs authorities, however, it has been submitted to this Court by their counsel that even if there was power to return the money that the Revenue Commissioners would not do so. It is claimed that the plaintiff has no merits. It is not apparent how this is relevant or even established. It falls then to consider whether the customs authorities have any choice in the matter. The words in s. 25 of the Act of 1876 “hereby authorised to return any money which shall have been overpaid as duties of customs” are the relevant words so far as the section is concerned. The question is whether these words are obligatory or merely permissive. If they are permissive only then the words import a discretion. Prima, facie, the words “hereby authorised” import a discretion. However, the general context must be examined to see if there is anything in the subject matter to indicate that these words are intended to be imperative.
It would be difficult to conceive that the legislature would have authorised a refusal to return moneys acknowledged or established to have been erroneously or wrongly demanded and exacted as taxes or duties by the State, or by any organ of the State, or (as it was at the time the Act was passed) by the Crown, or by or under the authority of the Crown. Such an intention on the part of the legislature would require to be expressed in the clearest and most unambiguous terms, even if one is to assume that such legislative provision could now be validly made. One must assume, until the contrary is clearly expressed, that a statutory power authorising the repayment or the return of overpayments of customs duties authorises that repayment for the sake of justice or for the good of the person for whose benefit the provision exists. The person or persons who are specifically pointed out by s. 25 of the Act of 1876 are the person or persons who have overpaid the duty. The conditions under which they are entitled to call for its exercise are also set out in s. 25, namely, that there has been an overpayment and that it is proved to the satisfaction of the Revenue Commissioners that the duties were overpaid in error. Upon these conditions being fulfilled the person who has paid the duties is entitled to call for the return of the overpayments. In my view the statute is not to be construed as merely conferring a discretion to return the overpayments when those other conditions have been satisfied. The correct construction of the provision in question is that, upon the fulfilment of the conditions laid down by the section, the customs authorities are not lawfully authorised to do otherwise than to return the overpayments. Provided the claim was made and established within the period of six years, as it was in this case, the overpayments must be returned.
The learned judge in the High Court expressed the view, correctly in my opinion, that the sections of the Acts of 1825, 1833 and 1845 (already referred to), envisaged successful actions for the recovery of overpayments of duties. It does not appear from his judgment that he considered the effect of s. 25 of the Act of 1876. However, it does appear from the notes of counsel on each side that in the High Court s. 25 of the Act of 1876 was mentioned for the first time in the reply of plaintiff’s counsel to the submission of counsel for the defendant raising s. 30 of the Act, which section had not been pleaded in the defence. In my view the plaintiff was entitled to enforce by this action his right to the return of his overpayments, as provided for in s. 25 of the Act of 1876, and that he must have judgment for the sum overpaid.
In the result it is unnecessary to consider the other interesting aspects of the case relating to the conditions under which money paid by reason of a mistake of law or a mistake of fact may be recovered at common law. I do not think it necessary to express any view on how the matter would be resolved if the claim were not to be governed by s. 25 of the Act of 1876. These and the many other interesting points raised in the course of argument during the hearing in this Court and, as appears from the judgment of the learned High Court judge, discussed during the hearing in the High Court must await another occasion.
In my view the order of the learned High Court judge must be set aside and in lieu thereof judgment must be entered for the plaintiff for the full amount. It was agreed in the correspondence between the parties that judgment against the named defendant would be adequate.
Kildare Meats Ltd. & Anor v. Minister for Agriculture and Food
[2004] IESC 8 (29 January 2004)
JUDGMENT delivered on the 29th day January 2004 by FENNELLY J. [Nem Diss]
This appeal relates to a claim for the payment of export refunds on beef which was exported from the territory of the European Community as long ago as 1987. The Defendant/Appellant (hereinafter “the Minister”) made a decision refusing payment of the export refunds, or, more precisely, forfeiting the security provided to guarantee their export. The Plaintiff/Respondent (hereinafter “Kildare Meats”) sued for payment of the amount of the refund, but did not apply for Judicial Review or otherwise directly challenge the Minister’s decision. The High Court heard the claim as a straightforward claim for money due. Kildare Meats succeeded.
Mr Justice Smyth, in his judgment of 31st July 2001, declared that a sum of money to be quantified was due properly from the Minister to Respondent in respect of the exportation to the Lebanon via Port Said in Egypt on or about the 8th or 9th June 1987 of 8,435 cartons weighing 222 metric tonnes of frozen boneless beef together with interest for a period of five years.
The Minister makes a preliminary point on the hearing of the appeal. It is that the action was not maintainable, because Kildare Meats had never challenged the validity of his decision. Since the decision of the Minister remains in force, Kildare Meats is not entitled to payment of the export refunds. This judgment deals with that preliminary issue only.
I will refer, firstly, to the main facts concerning the export of the beef and to the proceedings to date; secondly, I will, describe the system of export refunds; thirdly, I will consider the arguments of the parties.
The Facts
On 26th of April 1987, the m.v. Igloo sailed from the port of Greenore, destined for Port Said carrying a consignment of almost 500 tonnes of beef net weight.
Prior to the exportation, Kildare Meats had secured the Minister’s decision to pay in advance the applicable export refunds in respect of export of the goods outside the Community. These amounts had been paid and the appropriate security provided by a financial institution, in accordance with the applicable Regulations. Kildare Meats had completed the necessary declarations and had placed the goods under customs control. The consignee was declared to be the Egyptian Company for Meat Poultry and Food Supply, Cairo. The beef was accompanied by certificates that it had been inspected by a veterinary surgeon and was “sound, healthful, wholesome and otherwise fit for human food.” The Minister had also provided a Sanitary Certificate to the effect that the meat was free from “any sign of decay or putrefaction rancidity or abnormal or offensive odour.”
According to the bill of lading, the beef was consigned to the Egyptian Company for Meat Poultry and Food Supply and was to be discharged at Alexandria or Port Said. It appears that the Egyptian authorities, in circumstances which are in dispute, rejected part of the beef on grounds of alleged unfitness. The learned trial judge did not accept that the beef was unfit. As will appear later in this judgment, it is not necessary to arrive at any conclusion on that issue for the resolution of this appeal.
The rejected part of the consignment was reshipped under a new bill of lading, also purportedly dated 26th April 1987, in respect of 231.3818 net tonnes, destined for Beirut in the Lebanon and consigned to Dekermendjian Freres.
Kildare Meats claimed that, by exporting the meat to the Lebanon, it had complied with all requirements of the export refund scheme. It submitted documents to the Minister as proof. From about February 1988, it commenced to demand release of its security. There followed, over a period of some two and a half years, protracted correspondence concerning the adequacy of proofs provided by Kildare Meats. The Minister sought explanations for the fact that the beef had sent on from Egypt to the Lebanon, the authenticity of the Lebanon import document and other proof that the beef had been sold for home consumption in that country.
It is unnecessary and would be inappropriate, in addressing the preliminary issue, to discuss the merits of the positions adopted by the parties in respect of these issues. To do so would beg the question of whether the learned trial judge was correct in adopting the burden of deciding the issues in contention himself, rather than, as proposed on behalf of the Minister, considering the correctness of the Minister’s decision.
It suffices to mention, without comment, that the Minister, in correspondence, drew attention, inter alia, to the following points:
Evidence, which he claimed to have, suggesting that the Egyptian authorities had rejected the goods on health grounds;
The need for an explanation of the import of the goods into Egypt and re-export from that country;
Discrepancies in documents in respect of dates of transport, weights and numbers of beef cartons;
Suggestions of persistent irregularities in respect of export to Lebanon and the consequent need to have import documentation authenticated;
The suggested need for supplementary proof of import for home consumption in the Lebanon.
Kildare Meats sought to satisfy the Minister that it had fully complied with his legitimate requirements. It sought additional documentary proofs and furnished additional information.
Matters came to a head in October 1990. The Minister wrote on 22nd October, giving notice that he was declaring forfeit the sum of £366,437.14 being security in respect of advance payment of export refunds plus regulatory penalty. He gave the following reasons:
“(i) Clear, incontrovertible evidence has not been submitted of the import of the beef into Lebanon for home use. Such evidence as has been submitted contains contradictory statements as regards quantities and dates of import.
(ii) Evidence has not been submitted that the product was of sound and fair marketable quality and fit for human consumption at the time of shipment to Lebanon notwithstanding its rejection by the Egyptian authorities.
(iii) The bill of lading submitted as evidence of transport of the beef from Ireland to Lebanon is not considered to be in compliance with Art 20.5 of Regulation 2730/70.”
The Proceedings
In the Plenary Summons issued on 12th November 1990, Kildare Meats sought an injunction restraining the Minister from forfeiting the security and damages. In the event, Lardner J refused an application for an interlocutory injunction. In the Statement of Claim delivered 2nd January 1991, Kildare Meats referred to the export of the meat and the Minister’s decision purporting to forfeit the security. It pleaded that the Minister was not entitled to demand “payment of the said advance payments together with the regulatory penalty but rather is indebted to [Kildare Meats] in the amount detailed above.” This refers to the amount of the export refund claimed. The Statement of Claim than sought a declaration that the relevant sum “is properly due” by the Minister to Kildare Meats as well as a smaller sum by way of additional export refund, which was not allowed by Smyth J and which is not now relevant. No application for Judicial Review was made nor does the Statement of Claim impugn the decision of the Minister on any ground that might provide the basis for such an application.
The Defence of the Minister consists essentially of a denial of liability. It does not propound the decision of 22nd October 1990 as a bar to the plaintiff’s claim.
After a delay of almost a decade, which remains unexplained, the case came on for trial before Smyth J in June 2001. The hearing lasted six days.
At the hearing in the High Court, counsel on behalf of the Minister submitted, as a preliminary matter that the Minister, by his decision of 22nd October 1990, had decided that Kildare Meats was not entitled to export refunds in respect of the beef claimed to have been imported into the Lebanon. Since that decision had not been impugned on any of the established grounds for Judicial Review, the plaintiff’s claim must fail. Furthermore, in any challenge to the correctness of the Minister’s decision, the court should confine itself to the evidence which was before the Minister at the time he made his decision. In particular, evidence should not be admitted of matters which could have been furnished to the Minister in response to his requests for further information. Objection was, accordingly, taken to the admissibility of any oral evidence of any matters which were not before the Minister when he made his decision.
The learned trial judge did not accept the Minister’s submissions. He said that it was not a case of Judicial Review and heard the entire matter on its merits. He assessed the evidence himself and made findings, for example, on the question of the condition of the beef and the facts surrounding import into the Lebanon.
The appeal
The Minister reiterates these arguments on this appeal. In particular he says that the learned trial judge erred in law by usurping the role of the Minister as the competent authority for Ireland and the paying agent for the Commission of the European Communities under the Community Regulations. He should have approached the claim as one constituting a challenge to the validity and/or legality of the decision. That matter should have been considered on the basis of the evidence and documentation which was before the Minister at the time when he made the decision.
Counsel for the Minister both in written submissions and on the hearing of the appeal referred in some detail to the legislative and regulatory framework within which the scheme for the payment of export refunds takes place, in order to demonstrate, in particular, that it is the Minister who must satisfy himself that a trader has complied with the provisions of any applicable Regulations. I will refer to some of these provisions in more detail, when explaining my conclusion.
Kildare Meats accepts that its action was a substantive plenary action and that it sought to establish its entitlement to export refunds under Irish law. Its claim was neither an appeal nor a Judicial Review action. It sought to establish not that the Minister was right or wrong per se in coming to his decision but rather Kildare Meats’ compliance with Community law and thus its entitlement to the export refunds. Turning to the substantive claim to the export refunds, it was argued that the under the Regulations that the relationship between the parties as constituted by certain of the administrative documents for export was “in effect …a contractual relationship.” Although Kildare Meats furnished very detailed written submissions to the Court, these concern principally the claimed right to the payment of the export refunds by reason of the directly effective provisions of Community law. In response to the complaint regarding the admission of the oral evidence of certain witnesses, it is stated that, since this was a plenary action, the evidence was admissible. In other parts of its submissions, Kildare Meats undoubtedly criticises the decision as such, and advances arguments appropriate to a Judicial Review. However, this seems to me to be rather beside the point. It is common case that the matter was not heard as a Judicial Review in the High Court.
What needs to be decided is the nature of, not only the system of export refunds, but the administration more generally of the Common Agricultural Policy (CAP) of the European Communities as implemented in this State.
Export refunds
The system of export refunds is part of the CAP. For many years, a mass of regulations has provided for the payment of export refunds in respect of the export of many agricultural products. The basic object of the system is to dispose of surplus European Community produce on third country markets. As was stated by Advocate General Reischl in his opinion in Case 125/75 Eier-Kontor v Hauptzollamt Hamburg-Jonas, [1977] ECR 771 at page 788, “the object of the refund rules…is to make Community products competitive as to price and to secure their sale on the markets of third countries.” However, since Community prices are generally higher than those prevailing on world markets, this can only done by the European Community providing the form of subsidy known as an export refund.
It is not surprising, given the unexplained antiquity of Kildare Meats’ action, that all of the important European Community regulations relevant to the case have now been repealed and replaced.
Council Regulation EEC 805/68 had provided for the payment of export refunds in respect of exports form the Community of beef and veal. At the time of the Kildare Meats export transaction, with which we are concerned, the detailed rules were laid down by Commission Regulation (EEC) No 2730/79 of 29 November 1979 laying down common detailed rules for the application of the system of export refunds on agricultural products. As stated in one of the recitals, payment could only be made subject to the condition that the product had not only left the geographical territory of the Community but had also been imported into a non-member country. The Commission Regulation laid down the common detailed rules for the application of the system of export refunds. Those rules comprised the following principal steps:
a declaration by which the exporter stated his intention to export the products in question and qualify for a refund;
placing the products under customs control prior to export;
the document to be used on the completion of customs export formalities in order for products to qualify for a refund;
the furnishing of proof that the product in respect of which customs export formalities had been completed had, within 60 days from the day of completion of such formalities, left the geographical territory of the Community unaltered.
payment of the refund on exports to a non-member country, only if the product had been imported into a non-member country for which the refund was prescribed;
prescribed documentary proofs, which, when produced, were deemed to establish that the goods were to be considered to have been imported into the non-member country;
non-payment of the refund for products which were not of sound and fair marketable quality or on products intended for human consumption whose characteristics or condition exclude or substantially impair their use for that purpose.
The basic CAP regulation was Council Regulation (EEC) No 729/70 of the Council on the financing of the common agricultural policy, since replaced. Article 1 provided for the establishment of The European Agricultural Guidance and Guarantee Fund, in two parts: the Guarantee Section; the Guidance Section. Export refunds were financed by the former. Article 4 required Member States to designate the authorities and bodies which they empowered to effect this expenditure and to communicate their particulars to the Commission. Member States were required to draw up and furnish to the Commission, annual accounts of its conduct of the responsibilities of its designated intervention agent. Article 8(1) provided:
The Member States in accordance with national provisions laid down by law, regulation or administrative action shall take the measures necessary to:
– satisfy themselves that transactions financed by the Fund are actually carried out and are executed correctly;
– prevent and deal with irregularities; – recover sums lost as a result of irregularities or negligence.
The Minister was designated by the European Communities Common Agricultural Policy) (Market Intervention) Regulations, 1973 (S.I. No. 24/1973) to act as intervention agent in Ireland for this purpose.
Conclusion
The essence of the submission of Kildare Meats is that it is unnecessary for it to challenge the decision of the Minister. Although that decision, rightly or wrongly, purported to deprive Kildare Meats of the entitlement it should otherwise have had to be paid export refunds, if it had fully complied with the Regulations, and purported to forfeit the security provided, Kildare Meats could ignore that decision and proceed directly to court, asking the High Court to decide all disputed aspects of the transaction and award the export refunds to the plaintiff.
I am satisfied that this argument is misconceived. It is necessary to bear in mind the entire structure of the system for the administration of the CAP. Article 4 of Council Regulation 729/70 requires the Member States to designate the authorities and bodies which they empower to effect this expenditure. Ireland has, by S.I. 24 of 1973 designated the Minister for that purpose. No doubt a theoretical case could be constructed for the proposition advanced on behalf of Kildare Meats, where all the Minister’s requirements have been met and he stubbornly refuses to pay. Even in such a case, the relationship does not fall under the private law of contract.
A detailed analysis of the key Regulation in this case, Commission Regulation 2730/79, demonstrates the administrative nature and, therefore, public-law character, of the function of paying export refunds. Article 9(1) provides that the “refund shall be paid only upon proof being furnished that the product in respect of which customs formalities have been completed has, within 60 days …… reached its destination unaltered …… or … … left the geographical territory of the Community unaltered.” The same provision permits “the competent agency of the Member State” to extend that time limit. In some cases (Article 10) additional proof of import into a non-member country may be required, to wit, “where there is serious doubt as to the true destination of the product.” In cases mentioned in this Article, “the competent authorities of the Member States may require satisfactory additional proof that the product has been placed on the market in the non-member country of import.” Article 20, which applies in the present case, provides for refunds varying according to the destination non-member country. Here Article 20(3) provides for the documents which prove that certain “formalities have been completed…” Article 20(4) envisages cases where the proofs are “considered inadequate.” Article 30(1) states:
“The refund shall be paid only on written application by the exporter and shall be paid by the Member State in whose territory customs export formalities were completed. Member States may prescribe a special form to be used for this purpose”.
Regulation 2730/79, like many other CAP regulations, established an administrative system. It set up the machinery for the payment of export refunds. The competent authorities designated by the Member States were required to take a number of designated steps to operate the scheme. This involves the exercise of discretion, in certain cases, and the carrying out of supervision in others. The basic paying provision entailed the production to the competent authority of documentary proofs covering each stage of the transaction, commencing with the placing of the goods under customs control prior to export and ending with the import of the goods into a non-member country for which the refund is prescribed. International trade generates appropriate documents for these purposes. Cases of irregularity or fraud are covered by specific provisions. It is expected that the competent authority, usually called the Intervention Agency, will handle all aspects of the scheme administratively and make decisions capable, in order to protect the interests of affected traders, of being judicially reviewed.
Most relevant to the present case is Article 15, which provided:
“1. Member States may advance to the exporter all or part of the amount of the refund as soon as customs export formalities are completed , on condition that he provides security to guarantee repayment of the amount advanced plus 15%.
2. The amount advanced plus 15 %, as referred to in paragraph 1, shall be repaid by the exporter in proportion to the quantities in respect of which the proof required by this regulation to qualify for the refund is not furnished within the period stipulated in article 31.
where , however , by reason of force majeure :
– the proof referred to above cannot be furnished , the additional 15 % shall not be charged ,
– the product is delivered to a destination other than that for which the advance was calculated , repayment of that advance shall be limited to the amount to which the exporter is not entitled .
3. If the amount is not repaid after being requested, the security shall be forfeited in proportion to the quantities concerned.”
It was pursuant to this provision that the Minister made his decision, communicated on 22nd October 1990, purporting to forfeit the security.
This decision, until set aside or abandoned, had the effect, once the security had been forfeited, of depriving Kildare Meats of its right to the export refunds claimed. The decision could not simply be ignored or bypassed by a direct claim for payment of the refunds. Kildare Meats’ proceedings were, therefore, misconceived.
I am also, however, of opinion that the defence filed on behalf of the Minister as long ago as 1991 should have taken clear objection to the form of proceedings. It was not sufficient simply to deny liability. If the matter had been clearly pleaded, Kildare Meats would have had an opportunity to amend its pleadings. I am satisfied, for this reason, that it would be unjust to defeat the plaintiff’s claim, without giving it an opportunity to reformulate its claim. I would, therefore, allow the appeal and set aside the judgment and order of the High Court. However, I would propose that Kildare Meats be given liberty to amend its pleadings so as to challenge the decision of the Minister and that the Minister should be accorded a corresponding facility. The parties should be heard concerning the periods necessary for these amendments. Otherwise, the case should be remitted to the High Court.
Minister for Social, Community and Family Affairs v. Scanlon
[1999] IEHC 156 (11th May, 1999)
THE HIGH COURT
Judgment of Ms. Justice Laffoy delivered on the 11th day of May 1999
THE CLAIM
1. In these proceedings the Plaintiff seeks to recover from the Defendant the sum of £43,088.25 which is alleged to be due and owing by the Defendant to the Plaintiff in respect of disability benefit overpaid to the Defendant between 24th September, 1985 and 25th May, 1994.
THE FACTS
2. The essential material facts, which are not in dispute, are as follows:-
(a) On 1st October, 1985 the Defendant applied to the Minister’s department for disability benefit, stating that he had last worked on 27th July, 1985. His claim was processed and he was awarded disability benefit with effect from 24th September, 1985.
(b) Between 24th September, 1985 and 25th May, 1994 the Defendant received disability benefit payments at the rates applicable to him which aggregated the sum claimed, namely, £43,088.25.
(c) In 1994, the Defendant’s entitlement to disability benefit was reviewed and the review resulted in a revised decision of a deciding officer dated 15th June, 1994 which:-
(i) revised the original decision of a deciding officer to allow disability benefit for the period from 24th September, 1985 to 25th May, 1994, as the Defendant had worked between those dates;
(ii) decided that the disability benefit and pay related benefit paid in respect of those periods, amounting to £41,566.15 and £1,522.10 respectively, be disallowed; and
(iii) decided that benefit in respect of all those days was paid on the basis of statements or representations which were false or misleading in a material respect or by wilful concealment of material facts and, as a consequence, that the benefit paid was repayable.
Sections 248 and 249(a) of the Social Welfare (Consolidation) Act, 1993 (the Consolidation Act of 1993) were invoked in the certificate of that decision.
(d) The Defendant appealed that decision of the deciding officer to an appeals officer and, following an oral appeal, the appeals officer issued her decision on the appeal in April 1995, which was that in the period from 24th September, 1985 to 25th May, 1994, the Defendant was not entitled to disability or pay related benefit as new evidence available showed that he was working during this period. As to the reasons for the decision on appeal, the appeals officer stated as follows:-
“On examination of the evidence, I am satisfied that the appellant’s involvement in the business as Manager and occasional operator, constituted work and he derived benefit from this work. I am not fully satisfied that the appellant knowingly made false or misleading statements in claiming disability benefit, but based on the new evidence that he was working, I am satisfied that benefit was not payable and should be refunded.”
(e) The only evidence before the Court of a demand for repayment of the sum of £43,088.25, on which these proceedings is based, is of a demand made on 17th June, 1994, in the interim period between the revised decision of the deciding officer and the decision of the appeals officer.
THE RELEVANT STATUTORY PROVISIONS
3. In order to ascertain the legal position of a recipient of disability benefit during the years from 1985 to 1994 in respect of whom a deciding officer or an appeals officer has made a revised decision it is necessary to consider the following statutes:-
(1) The Social Welfare (Consolidation) Act, 1981, (the Consolidation Act of 1981);
(2) The Social Welfare Act, 1991 (the Act of 1991);
(3) The Social Welfare Act, 1992 (the Act of 1992);
(4) The Social Welfare Act, 1993 (the Act of 1993); and
(5) The Consolidation Act of 1993.
4. Section 300 of the Consolidation Act of 1981 dealt with revision of a decision of a deciding officer by a deciding officer or an appeals officer. Subsection (5) of Section 300 as originally enacted provided as follows:-
“A revised decision given by a deciding officer or an appeals officer shall take effect as follows:-
(a) where any benefit…will, by virtue of the revised decision, be disallowed…and the revised decision is given owing to the original decision having been given, or having continued in effect, by reason of any statement or representation (whether written or verbal) which was to the knowledge of the person making it false or misleading in a material respect or by reason of the wilful concealment of any material fact, it shall take effect as and from the date on which the original decision took effect but the original decision may, in the discretion of the deciding officer or appeals officer (as the case may be), continue to apply to any period covered by the original decision to which such false or misleading statement or representation or such wilful concealment of any material fact does not relate; and
(b) in any other case, it shall take effect as from the date considered appropriate by the deciding officer or appeals officer (as the case maybe), but-
(i) any payment of benefit…already made at the date of the revision shall (without prejudice to its being treated, in accordance with regulations for the purposes of Section 113(2)(b), as paid on account of another benefit) not be affected…”
5. Section 113 of the Consolidation Act of 1981 empowered the Minister to make regulations in relation to matters arising out of any appeal or revision of any decision under Part VIII of that Act, in which Section 300 was contained, and, by virtue of subsection (2)(b) thereof, he was specifically empowered to make regulations:-
“…in a case referred to in section 300(5)(a) for the repayment of any such benefit and the recovery thereof by deduction from any benefit…as maybe specified, or otherwise.”
6. Section 117 of the Consolidation Act of 1981 provided that all sums due to the Social Insurance Fund should be recoverable as debts due to the State and might be recovered by the Plaintiff as a debt under statute in any court of competent jurisdiction.
7. Section 35 of the Act of 1991 amended Section 300 of the Consolidation Act of 1981 by the insertion after paragraph (a) of subsection (5) of the following paragraph:-
“(aa) Where any benefit…will, by virtue of the revised decision, be disallowed…and the revised decision is given in the light of new evidence or new facts which have been brought to the notice of the deciding officer or appeals officer (as the case maybe) since the original decision was given, it shall take effect from such date as that officer shall determine having regard to the new facts or new evidence.”
8. Section 117 of the Consolidation Act of 1981 was amended by Section 38 of the Act of 1991 but the amendment is not material for present purposes.
9. Section 40 of the Act of 1992 clarified paragraph (aa) of subsection (5) of Section 300 and provided as follows:-
“For the avoidance of doubt, the provisions of paragraph (aa) (inserted by Section 35 of the Act of 1991) of Section 300(5) of the Principal Act shall apply to new facts or new evidence relating to periods prior to and subsequent to the commencement of that paragraph.”
10. Section 31(1) of the Act of 1993 amended the Consolidation Act of 1981 by substituting for Section 300 the sections therein set out, which were numbered 300 and 300A to 300H inclusive. Section 300B dealt with the effect of revised decisions and determinations. By virtue of Section 32 of the Act of 1993, Section 117 of the Consolidation Act of 1981, as inserted by Section 38 of the Act of 1991, was repealed. The repealed provision was replaced by Section 300F, but, again, the amendments introduced in this provision are not material for present purposes.
11. Finally, the Act of 1993 was repealed by the Consolidation Act of 1993. Section 249 of the latter provides as follows:-
“A revised decision given by a deciding officer shall take effect as follows:-
(a) where any benefit…will, by virtue of the revised decision be disallowed…and the revised decision is given owing to the original decision having been given, or having continued in effect, by reason of any statement or representation (whether written or verbal) which was to the knowledge of the person making it false or misleading in a material respect or by reason of the wilful concealment of any material fact, it shall take effect as from the date on which the original decision took effect, but the original decision may, in the discretion of the deciding officer, continue to apply to any period covered by the original decision to which such false or misleading statement or representation or such wilful concealment of any material fact does not relate;
(b) where any benefit…will, by virtue of the revised decision be disallowed…and the revised decision is given in the light of new evidence or new facts (relating to periods prior to and subsequent to the commencement of this Act) which have been brought to the notice of the deciding officer since the original decision was given, it shall take effect from such date as the deciding officer shall determine having regard to the new facts or new evidence; and
(c) in any other case, it shall take effect as from the date considered appropriate by the deciding officer having regard to the circumstances of the case.”
12. Section 264 of the Consolidation Act of 1993 deals with the effect of a revised decision by an appeals officer and is in similar terms to the provisions of Section 249. Sections 249 and 264 re-enacted the provisions of Section 300B, inserted by Section 31(1) of the Act of 1993, as regards revised decisions of deciding officers and appeals officers substantially verbatim. Section 278 of the Consolidation Act of 1993 provides as follows:-
“Where, in accordance with the provisions of sections 249, 264…, a decision…is varied…by a deciding officer, an appeals officer …so as to disallow…any benefit…paid or payable to a person:-
(a) any benefit paid in pursuance of the original decision shall be repayable to the Social Insurance Fund to the extent to which it would not have been payable if the decision on the appeal or revision had been given in the first instance and such person and any other person to whom the benefit was paid on behalf of such person, or the personal representative of such person, shall be liable to pay to the said Fund, on demand made in that behalf by an officer of the Minister, the sum so repayable…”
13. The substance of the foregoing provision had been contained in subsection (4) of Section 300D, inserted by Section 31(1) of the Act of 1993.
14. Section 281 of the Consolidation Act of 1993 re-enacted Section 300F, inserted by Section 31(1) of the Act of 1993, and provided that all sums due to the Social Insurance Fund should be recoverable as debts due to the State and might be recovered by the Plaintiff as a debt under statute or a simple contract debt in any court of competent jurisdiction.
15. All of the provisions of the earlier acts which I have referred to above then extant were repealed by Section 300 of the Consolidation Act of 1993. However, the repeal was expressed to be subject to the following proviso:-
“Provided that without prejudice to the Interpretation Act, 1937, the provisions of the repealed enactments shall continue to apply to benefit…prior to the commencement of this Act to the same extent as if this Act had not been passed.”
16. Section 301 of the Consolidation Act of 1993 provided that the continuity of the operation of the law relating to the matters provided for in the repealed enactments should not be affected by the substitution of the Consolidation Act for those enactments.
APPLICATION OF THE STATUTORY PROVISIONS: QUESTIONS
17. Having regard to the foregoing provisions, the position of a recipient of disability benefit in respect of whom a deciding officer or an appeals officer has made a revised decision over the years in question here would have been as follows:-
(1) In the period from 1985 until the coming into operation of the Act of 1991, his position would have been governed by Section 300(5) of the Consolidation Act of 1981 as originally enacted and, unless he came within the provisions of paragraph (a), in other words, that a finding of fraud was made against him, benefit already paid to him prior to the revised decision could not be affected and was irrecoverable. This construction is consistent with the decision of this Court, (Barron J.) in The State (Hoolahan) -v- Minister for Social Welfare and the Attorney General , in which judgment was delivered on 23rd July, 1986.
(2) In the period from the coming into operation of the Act of 1991 until the coming into operation of the Act of 1993, his position would have been governed by Section 300(5) of the Consolidation Act of 1981, as amended by Section 35 of the Act of 1991, as clarified by Section 40 of the Act of 1992. This means that, if the revised decision did not relate to a finding of fraud but did come within paragraph (aa) of subsection (5), in other words, was based on new evidence, he would be outside the ambit of paragraph (b) of subsection (5) and the revised decision would take effect from the date determined by the deciding officer or the appeals officer, as the case might be. Two questions, which are relevant to the issue before the Court arise in relation to this period. First, if a revised decision made during this period was based on new evidence, as a matter of construction of the relevant statutory provision, was the deciding officer or the appeals officer, as the case might be, entitled to make a decision taking effect as and from a date prior to the commencement of the Act of 1991, which would have had the effect of disallowing and rendering recoverable benefit paid prior to such commencement? In other words, did the relevant statutory provision, Section 300(5)(aa), as clarified, have retrospective effect? Secondly, was there a liability to repay and a statutory mechanism for recovering benefit disallowed on account of new evidence in this period?
(3) In the period since the coming into operation of the Act of 1993 his position has been governed until it was repealed by the Act of 1993 and subsequently by the Consolidation Act of 1993. It is undoubtedly the case that under both Acts, where benefit is disallowed because of fraud or an account of new evidence it is recoverable from such date as the deciding officer or the appeals officer determines, assuming that date post-dates the coming into operation of the relevant Act. However, a question arises, which is relevant to the issue before the Court, whether, as a matter of the construction of the provisions of Section 300, as amended by the Act of 1993, and, in particular, Sections 300B and 300D(4), and, as a matter of the construction of the provisions of Sections 249, 264 and 278 of the Consolidation Act of 1993, a determination of a deciding officer or an appeals officer is capable of having effect so as to render recoverable benefit paid before the respective dates of commencement of those Acts. In other words, the question is did those provisions have retrospective effect?
RETROSPECTIVITY
18. The subject of retrospectivity of legislation was dealt with by the Supreme Court in Hamilton -v- Hamilton (1982) I.R. 467. In his judgment, at page 473, O’Higgins C.J. stated as follows:-
“For the purpose of stating what I mean by retrospectivity in a statute, I adopt a definition taken from Craies on Statute Law (7th ed., p.387) which is, I am satisfied, based on sound authority. It is to the effect that a statute is deemed to be retrospective in effect when it ‘takes away or impairs any vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability in respect to transactions or considerations already past’.”
19. Having stated that retrospective legislation, since it necessarily affects vested rights, has always been regarded as prima facie unjust, O’Higgins C.J. then went on to consider the approach at common law to the examination of a statute to determine whether the legislature intended it to have retrospective effect and stated as follows at page 474:-
“The result is a rule of construction which leans against such retrospectivity and which, according to Maxwell, is based upon the presumption ‘that the legislature does not intend what is unjust’ – see Maxwell on The Interpretation of Statutes (12th ed., p. 215)’.”
20. O’Higgins C.J. then went on to quote with approval from three English cases, including the following passage from the judgment of Wright J. (at page 551-552 in the report) in Re: Athlumney, ex. p. Wilson (1898) 2 Q.B. 547:-
“Perhaps no rule of construction is more firmly established than this – that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards matters of procedure, unless the effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.”
21. Finally, O’Higgins C.J. considered the proper approach to the consideration of an Act of the Oireachtas for restrospectivity and stated as follows at page 475:-
“In considering and interpreting Acts of the Oireachtas we must assume, in the first instance, that what the legislature has done was not intended to contravene the Constitution. The presumption of validity prevails until the contrary is clearly established. It follows that in interpreting or construing an Act of the Oireachtas where two possible meanings or intentions are open, one which conforms with an Act’s validity having regard to the provisions of the Constitution while the other does not, the meaning or intention which so conforms must be preferred. This is so because it must be assumed that the Oireachtas has intended to act within its powers and with due regard to the Constitution. This approach to the interpretation and construction of Acts of the Oireachtas is required by the Constitution. While it may not replace the common-law rule, it certainly supersedes it once the question of possible infringement of the Constitution arises.”
22. Applying the foregoing principles to the statutory provisions at issue in the instant case leads to the following conclusions. First, the introduction of a requirement that the recipient of State benefit refund benefit paid to him in circumstances in which no such requirement existed when the benefit was received, in my view, undoubtedly creates a new obligation in respect to a transaction already past. The introduction of such requirement brings about a substantive change in the recipient’s position, not merely a change of procedure or form. It is not merely a matter of taking past events into account; it is a case of applying new law to past events. When such requirement is introduced by statute, the statute is retrospective in effect within the definition of retrospectivity adopted by O’Higgins C.J. in Hamilton -v- Hamilton . Secondly, the fundamental question on the restrospectivity issue in the instant case is whether the words “it [the revised decision] shall take effect from such date as the deciding officer shall determine having regard to the new facts and the new evidence” in paragraph (aa) of Section 300(5), when read in the broader context of a provision which refers to the revised decision being given in the light of new evidence or new facts relating to periods prior to and subsequent to the enactment of the provision, are only open to one interpretation, namely, that the clear and unequivocal intention of the legislature was that the provision would have retrospective effect, or whether they are equally open to two interpretations, namely, one allowing for retrospective effect and the other providing for prospective effect only. In my view, the words in question in the context in question are equally open to the interpretation that legislature intended the relevant provision to have retrospective effect and the interpretation that it was intended to operate prospectively only. That being the case, according to the principles of construction applied by the Supreme Court in Hamilton -v- Hamilton , the relevant provision is to be construed as having prospective effect only. Thirdly, although the constitutionality of the relevant provisions is not in issue since Mr. Meehan, for the Defendant, contends for prospective operation only of those provisions, construing the provisions as operating prospectively only conforms with the validity of the provisions having regard to the provisions of the Constitution.
23. On that basis, Section 35 of the Act of 1991 which introduced paragraph (aa) did not have retrospective effect and, accordingly, benefit paid to the Defendant prior to the commencement of that Act is not recoverable. As regards benefit paid to the Defendant after the commencement of the 1991 Act, it was paid to and received by the Defendant on the basis that it could be affected by a revised decision in accordance with paragraph (aa) of Section 300(5) of the Consolidation Act of 1981, as inserted by the Act of 1991, which was outside the ambit of paragraph (b) of that sub-section and, in particular, the protection afforded by subparagraph (i) of that paragraph. Therefore, such benefit would have been recoverable on the making of a revised decision after the commencement of the 1991 Act disallowing it on the ground of new evidence, provided there was statutory liability for repayment and a mechanism for its recovery.
STATUTORY LIABILITY FOR REPAYMENT/ MECHANISM FOR RECOVERING BENEFIT
24. There was no such express liability or mechanism until the coming into operation on 2nd April, 1993 of Section 31(1) of the Act of 1993, which brought in Section 300D(4) of the Consolidation Act of 1981. In particular, the Regulation which provided for repayment to the Social Insurance Fund of benefit disallowed in consequence of a finding of fraud, Regulation 10 of Social Welfare (General Benefit) Regulations, 1953 (S.I. No.16 of 1953), was never extended to benefit disallowed on account of new evidence before the coming into force of Section 300D(4).
25. This raises the question whether Section 31(1) of the Act of 1993 and the introduction of Section 300D(4) had retrospective effect in relation to a revised decision founded on new evidence effective after the enactment of Section 35 of the Act of 1991. Applying the same principles of law and the same reasoning as I have applied earlier in relation to the issue of the retrospectivity or prospectivity of Section 35 of the Act of 1991, in my view, Section 300D(4) did not have retrospective effect and took effect prospectively only from 2nd April, 1993.
26. It was urged by Mr. Marry, on behalf of the Plaintiff, that Section 35 of the Act of 1991 was self-executing and that the absence of a Regulation on the lines of Regulation 10 or a statutory provision on the lines of Section 300D(4) did not prevent the Plaintiff recovering benefit disallowed thereunder on account of new evidence for the Social Insurance Fund. I do not accept this argument. Following the enactment of Section 300(5)(aa) in 1991, there was a patent cassus omissus in the Social Welfare code. While, in broad terms, a deciding officer or an appeals officer had a discretion as to the date on which a revised decision should take effect, whether the revision was founded on fraud or on new evidence, it was only in the case of a revised decision founded on fraud that an obligation to repay disallowed benefit to the Social Insurance Fund was imposed and that a mechanism, a demand by an officer of the Plaintiff, for triggering the entitlement of the State to recover was provided for.
CONCLUSION
27. Accordingly, the position in April 1995 when the appeals officer reversed the deciding officer’s revised decision based on fraud and substituted for it a revised decision based on new evidence was that, as a matter of law, benefit paid to the Defendant prior to the commencement of the Act of 1993 was not repayable to the Social Insurance Fund on demand under Section 278 of the Consolidation Act of 1993 because:-
(1) The revised decision of the appeals officer, being based on new evidence, could have taken effect only from the commencement of the Act of 1991; and
(2) The revised decision could only have taken effect so as to render disallowed benefit to be repayable to the Social Insurance Fund and recoverable on demand made by and officer of the Plaintiff from the coming into operation of the Act of 1993.
28. While, in consequence of the revised decision of the appeals officer, a demand for repayment of the benefit paid to the Defendant between 2nd April, 1993 and the 25th May, 1994 could have been made, in the absence of evidence of such a demand after the decision of the appeals officer, the liability of the Defendant under Section 278 of the Consolidation Act of 1993 has not been established. I do not accept Mr. Marry’s argument that the issuing of the Summary Summons in this case within the relevant limitation period was a sufficient demand within the meaning of Section 278, because the scheme of the Social Welfare code is that it is a demand which creates liability to re-pay and it is the existence of liability which empowers the Minister to sue and this is reflected in Sections 278 and 281 of the Consolidation Act of 1993.
29. The Plaintiff’s claim is dismissed.
Aer Rianta Cpt v. Ryanair Ltd.
[2004] IESC 23 (2 April 2004)
Judgment delivered on 2nd day of April, 2004 by Denham J. [Nem Diss]
This is an appeal by Ryanair Limited, the defendant/appellant, hereinafter referred to as Ryanair, from the judgment and order of the High Court (Lavan J.) given on the 29th July, 2003 refusing the application of Ryanair, under O. 19 r. 28 of the Rules of the Superior Courts, 1986, to strike out paragraphs number 15, 16 and 17 of the Statement of Claim of Aer Rianta CPT, the plaintiff/respondent, hereinafter referred to as Aer Rianta, in the main proceedings on the basis that “the said pleading discloses no reasonable cause of action.”
Aer Rianta has pleaded that in a press release issued in January, 2001, and on its website, Ryanair overstated the amount of airport charges levied by Aer Rianta pursuant to the Air Navigation and Transport (Amendment) Act, 1998, as amended. Aer Rianta pleads that Ryanair stated that the passenger service charge was IR£9.50 per person, while Aer Rianta pleads that it was IR£7.20. Aer Rianta claims that the actions of Ryanair have damaged its reputation and claims relief.
In the main proceedings Aer Rianta seeks, inter alia, declaratory relief, an account of monies, damages for defamation and malicious falsehood by reason of the statements alleged to have been made by Ryanair in a press release and on its website concerning the level of airport charges levied by Aer Rianta, a permanent injunction, an order for restitution and other relief. Aer Rianta alleges that Ryanair overstated the level of the charges, has characterised the nature and extent of airport charges at the airports of Aer Rianta in a false and misleading manner and has done so maliciously with the intent of causing damage to the business and reputation of Aer Rianta. It is alleged also by Aer Rianta that Ryanair have misled passengers using their services into believing that they are paying a higher passenger service charge than is in fact the case.
Ryanair, in its defence, denies the claim of Aer Rianta in defamation and pleads that the passenger service charge collected from its passengers was based on a number of different factors and that it was an approximation. Ryanair denies that Aer Rianta has the locus standi to pursue a claim based on unjust enrichment.
The pleadings in the action were instituted in January, 2001. The Statement of Claim was delivered in March, 2002. The Defence was delivered in May, 2002. In July, 2002 Ryanair served a Notice of Trial. In February, 2003 this motion was brought.
Ryanair by Notice of Motion sought an order pursuant to O. 19 r. 28 of the Rules of the Superior Courts, 1986 striking out paragraphs 15, 16 and 17 of the Statement of Claim on the basis that the said pleading discloses no reasonable cause of action.
One of the claims of Aer Rianta is that Ryanair has unjustly enriched itself in overstating the level of airport charges. This is set out in paragraphs 15, 16 and 17 of the Statement of Claim. Paragraph 15, 16 and 17 of the Statement of Claim state:
“15. In the premises, Ryanair has unjustly enriched itself to the extent that it has levied a charge on its passengers on the basis that it is a ‘charge’ or ‘tax’ payable to Aer Rianta but have not paid over the full amount thereof to Aer Rianta.
16. In addition, Ryanair has further unjustly enriched itself by retaining for its own benefit the so-called ‘passenger service charge’ or ‘tax’ levied by it on its passengers where, for any reason, the passenger fails to fly as scheduled. In those circumstances, notwithstanding that no PSC is payable to Aer Rianta, Ryanair refuses to repay the passenger the amount levied by it.
17. In the premises, to the extent that Ryanair has unjustly enriched itself in the manner aforesaid, it must account to Aer Rianta therefor. Aer Rianta cannot quantify the extent to which Ryanair has been unjustly enriched until the making of discovery and/or the delivery of interrogatories herein.”
On the motion coming before the High Court the learned High Court judge accepted the submissions of Aer Rianta and refused the application of Ryanair. Against that determination Ryanair has appealed.
This motion was brought pursuant to O. 19 r. 28 of the Rules of the Superior Courts, 1986 which provides:
“The Court may order any pleading to be struck out, on the ground that it discloses no reasonable cause of action or answer and in any such case or in case of the action or defence being shown by the pleadings to be frivolous or vexatious, the Court may order the action to be stayed or dismissed, or judgment to be entered accordingly, as may be just.”
Both in the High Court and on appeal in this court the motion proceeded on the basis of O. 19 r. 28 of the Rules of the Superior Courts alone. The issue of inherent jurisdiction was not argued and forms no part of the decision. Thus this decision is grounded on O. 19 r. 28.
The fact that a purely factual affidavit was filed with the motion does not undermine or enhance the jurisdiction of the court, which is that under O. 19 r. 28. The affidavit sets out the factual situation as to the pleadings and does not seek to advance any matter outside the pleadings.
The jurisdiction under O. 19 r. 28 to strike out pleadings is one a court is slow to exercise. A court will exercise caution in utilising this jurisdiction. However, if a court is convinced that a claim will fail such pleadings will be struck out.
An application by way of motion under O. 19 r. 28 is decided on the assumption that the statements in the Statement of Claim are true and will be proved at the trial. Thus this motion relates to and is grounded on the Statement of Claim of Aer Rianta.
Ryanair has sought the striking out of paragraphs 15, 16 and 17 of the Statement of Claim, not the striking out of the entire claim. Aer Rianta has submitted that the rule does not apply to strike out part of a claim. Thus the case turns on the wording of O. 19 r. 28.
I am satisfied that the words of the rule are clear. First, the rule provides that:
“The court may order any pleading to be struck out …”
The key word is “pleading.” There is no reference to any part of a pleading. There is no wording such existed in England and Wales, prior to the Woolf Reforms to the Civil Procedure Rules in 1999, where the equivalent rule expressly permitted the striking out of any pleading or “anything in any pleading.”
The construction that O. 19 r. 28 is referring to an entire document is supported by O. 125 r. 1 which defines “pleading” as “includes an originating summons, statement of claim, defence, counterclaim, reply, petition or answer.” In other words it refers to separate but individual documents and not parts of documents.
This construction is also supported by contrasting O. 19 r. 28 and O. 19 r. 27. O. 19 r. 27 provides:
“The Court may at any stage of the proceedings order to be struck out or amended any matter in any indorsement or pleading which may be unnecessary or scandalous, or which may tend to prejudice, embarrass, or delay the fair trial of the action …”
Part of a pleading is specifically addressed in O. 19 r. 27. The rule expressly relates to “any matter in any” pleading. By contrast, the next rule, the rule in issue, O. 19 r. 28, states merely that the court may order any pleading be struck out. All of this supports a construction that the rule relates to a full document.
Such an interpretation is consistent also with the further words of the rule. Thus O. 19 r. 28, having enabled a court to order any pleading be struck out, does so on the basis that “it” discloses no reasonable cause of action. This appears to refer to the whole document. Indeed the wording repeatedly refers to “the action”, which I would infer is referring to the action and pleading as a whole.
The latter part of O. 19 r. 28 is also clear. It enables the court to order that “the action be stayed or dismissed, or judgment be entered accordingly, as may be just.” This indicates that the whole action is acted upon, the whole document is acted upon, the action is stayed, dismissed or judgment entered. It does not relate to a part of the pleading.
Further, if Ryanair were to succeed they could not obtain an order that “the action be stayed or dismissed or judgment be entered accordingly.” Thus even if Ryanair succeeded they could not obtain the reliefs provided for in O. 19 r. 28.
I am satisfied that the clear words of O. 19 r. 28 refer to single documents and not parts of a pleading. I am satisfied that on the plain meaning of the words O. 19 r. 28 applies to a pleading in its entirety and not to part of a pleading. Accordingly, under O. 19 r. 28 the court has jurisdiction to strike out an entire pleading, an entire document, for example a Statement of Claim, but not a portion of it.
Quite apart from the plain meaning of the clear words of O. 19 r. 28, I am satisfied that to develop what Aer Rianta has referred to as a “blue pencil” jurisdiction would have inappropriate consequences. It would have the potential of initiating a whole new jurisdiction of interlocutory applications whereby parties sought to blue pencil (strike out) portions of Statements of Claim or Defences. It could herald a whole new list in the High Court where parties would fight on the pleadings. Such an approach is contrary to the policy of expeditious litigation. It would involve further cost and raise that consideration also. In addition it would involve motions which could be time consuming; as if part of a pleading is to be sought to be struck out, the probability is that at least one party will seek to have the issue analysed in the context of the whole pleading. Thus the entire pleading would be considered by the court. Indeed, there may be great difficulty in analysing a part of a pleading independent of the rest of the pleading.
I am satisfied that by reason of the plain meaning of the words a court does not have jurisdiction to strike out part of a pleading under O. 19 r. 28. This interpretation is based on a construction of the plain meaning of the words of the rule. However, it is also consistent with a policy of cost effective litigation enabling matters to come with reasonable expedition before a trial court for consideration and contrary to costly lengthy litigation with multiple interlocutory motions. In view of this construction of the rule, the issues raised as to the merits of the application do not arise.
Consequently, for the reasons given, I would dismiss the appeal. I would affirm the order of the High Court refusing the motion.
Graham v. President of the District Court
[1998] IESC 62 (14th December, 1998)
THE SUPREME COURT
Barrington J.
Lynch J.
Barron J.
115/98
GRAHAM
V.
PRESIDENT OF THE DISTRICT COURT.
JUDGMENT (ex-tempore) delivered on the 14th day of December, 1998 by Barrington J(Lynch and Barron JJ concurring)
1. The Prosecutor was wrongly sentenced in the District Court to a term of imprisonment of twelve months when the maximum sentence for the offence which he had committed was three months. He appealed to the Circuit Court. He apparently did not turn up for his appeal and the District Court Order was affirmed. Ultimately, after a delay, the Prosecutor was arrested and committed to Mountjoy Prison.
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2. He was an impecunious person and there was very considerable danger of a serious miscarriage of justice. He could have served a sentence wrongly imposed upon him but for the interference of the Solicitor and Counsel who subsequently handled his case. He had no legal aid. They brought the case and they made submissions before the learned trial Judge. One of the issues was whether the learned trial Judge should remit the case to the District Court. The learned trial Judge decided not to remit the case to the District Court and then he said in view of the fact that the Applicant had pleaded guilty, he felt that he had granted him sufficient equity. As my learned colleague Mr. Justice Barron has pointed out, it is hard to follow the precise reasoning there because the fact that a person has succeeded on a particular issue which arises as a substantial issue in a case, would not normally be a reason for not allowing him the costs. But even more important I think in this case is the fact that this was a case where there was a potential miscarriage of justice which was averted by the action of Mr. Condon BL and his instructing Solicitor, and it had not been spotted by the representative appearing for the Director of Public Prosecutions either in the District Court or in the Circuit Court, and under these circumstances the only way of putting the matter right was by a State side application. That application was brought, and was successful, and it appears to this Court that under the circumstances the Prosecutor is entitled to his costs in the High Court
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and of this appeal, including the costs of the original application for habeas corpus , to be treated as an initial application for certiorari.