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

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    49.  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.


    50.  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.


My Lords,

    51.  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.

    52.  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.

    53.  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.

    54.  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.

    55.  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

    56.  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.

    57.  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.

    58.  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.

    59.  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).

    60.  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).

    61.  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

    62.  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.

    63.  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.

    64.  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.

    65.  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

    66.  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.

    67.  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.

    68.  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.

    69.  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.

    70.  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.

    71.  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.

    72.  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.

    73.  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

    74.  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.

    75.  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.

    76.  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.

    77.  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.

    78.  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.

    79.  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.

    80.  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.

    81.  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.

    82.  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.

    83.  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

    84.  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.

    85.  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.

    86.  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).

    87.  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.

    88.  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.

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