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Judgments - Sempra Metals Limited (formerly Metallgesellschaft Limited) (Respondents) v. Her Majesty's Commissioners of Inland Revenue and another (Appellants)


    SESSION 2006-07

    [2007] UKHL 34

    on appeal from: [2005] EWCA Civ 389





    Sempra Metals Limited (formerly Metallgesellschaft Limited) (Respondents)


    Her Majesty's Commissioners of Inland Revenue and another (Appellants)

    Appellate Committee

    Lord Hope of Craighead

    Lord Nicholls of Birkenhead

    Lord Scott of Foscote

    Lord Walker of Gestingthorpe

    Lord Mance



    Ian Glick QC

    Rupert Baldry

    Gerry Facenna

    (Instructed by Solicitor's Office, HM Revenue and Customs)


    Laurence Rabinowitz QC

    Francis Fitzpatrick

    Steven Elliott

    (Instructed by Slaughter & May)

    Hearing dates:

    1 and 2 November 2006

    Further heard:

    16 May 2007


    WEDNESDAY 18 JULY 2007




Sempra Metals Limited (formerly Metallgesellschaft Limited) (Respondents) v. Her Majesty's Commissioners of Inland Revenue and another (Appellants)

[2007] UKHL 34


My Lords,

    1.  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.

    2.  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

    3.  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.

    4.  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.

    5.  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.

    6.  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?

    7.  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.

    8.  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

    9.  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.

    10.  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.

    11.  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

    12.  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.

    13.  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.

    14.  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

    15.  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.

    16.  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.

    17.  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.

    18.  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

    19.  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.

    20.  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.

    21.  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.

    22.  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.

    23.  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.