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

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    123.  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.

    124.  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.

    125.  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

    126.  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.

    127.  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.

    128.  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.

    129.  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

    130.  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.

    131.  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.


My Lords,

    132.  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.

    133.  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 1-579, 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.

    134.  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).

    135.  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.

    136.  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.

    137.  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.

    138.  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.

    139.  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.

    140.  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.

    141.  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.

    142.  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.

    143.  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"

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