(back to preceding text)

    24.  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.

    25.  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.

    26.  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.

    27.  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.

    28.  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.

    29.  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.

    30.  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."

    31.  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.

    32.  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.

    33.  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.

    34.  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.

    35.  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.

    36.  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.

    37.  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.

    38.  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.

    39.  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."

    40.  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.

    41.  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.

    42.  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.

    43.  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.

    44.  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.

    45.  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?

    46.  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.

    47.  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.

    48.  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.