The House of Lords ruled that that interest losses caused by a breach of contract or by a tortious wrong were 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. Further, their Lordships held (by a majority) that the restitutionary remedy allowed by English law to a person who had made a payment under a mistake could entitle the claimant to recover not only the payment but also interest thereon that the person under the obligation to make repayment had never received or to recover the value of an assumed benefit derived from the mistaken payment that that person had never in fact enjoyed.

Facts

The taxpayer made a claim for compensation by way of restitution equal to the interest which it could have obtained from the use of money paid to the Revenue by way of advance corporation tax in breach of Community law.

The taxpayer was a company resident in the UK and a subsidiary of a German parent, a company established in another EU member state. During the years when the advance corporation tax ('ACT') regime was in operation the taxpayer paid several dividends to its parent and the associated ACT. The normal operation of the ACT system required a company which paid a dividend also to pay to the Revenue ACT which it could later set off against its liability to pay 'mainstream' corporation tax ('MCT’) on its taxable profits. The effect was that, if a company chose to pay a dividend, it had to accept that consequently it would have to pay some of the corporation tax on its profits sooner than it would otherwise have had to do. There was an exception to the normal rule that a company which paid a dividend also had to pay ACT: if the dividend paying company was a subsidiary of a UK parent company, the two companies could join in making a group income election under ICTA 1988, s. 247. However, group income elections could only be made where both the subsidiary and the parent were resident in the UK.

In the case of Metallgesellschaft Ltd v IR Commrs; Hoechst UK Ltd v IR Commrs (Joined cases C-397/98 and C-410/98) [2001] BTC 99; [2001] ECRI-1727, the European Court of Justice ('ECJ') decided that that was contrary to Community law so that UK law had effectively required the UK subsidiary to pay part of its MCT prematurely. The court also decided that UK subsidiaries of parents in other member states which had paid ACT in the past were entitled to compensation for the timing disadvantage which they had suffered. The amounts of compensation and other associated issues were to be determined by the national court.

Questions arose as to the calculation of interest over the period from the date on which ACT was paid until the date on which it was set off against MCT ('the premature tax payment period') and for the period from when the cause of action accrued until the date of judgment ('the post-utilisation period').

The High Court held that the restitution or compensation payable to a company which had been required to pay ACT on dividends paid to its non-UK resident parent in breach of European Community law was to be calculated by reference to a conventional interest rate applied by way of compound interest over the premature tax payment period ([2004] BTC 358). The Court of Appeal upheld that decision ([2005] BTC 202) but the Revenue appealed to the House of Lords.

Issue

Whether the calculation of the award that was required by Community law in the circumstances of this case should be effected on the basis of compound interest, as the taxpayer contended, or of simple interest, as the Revenue contended.

Decision

Lord Hope (dismissing the appeal) (Lords Nicholls and Walker delivering concurring opinions, Lords Scott and Mance dissenting in part) said that, as regards 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, the House should take the opportunity of departing from Lord Brandon's analysis in President of India v La Pintada Compania Navigation SA [1985] 1 AC 104 and hold that, at common law, subject to the ordinary rules of remoteness which applied to all claims of damages, the loss suffered as a result of the late payment of money was recoverable.

That was already the law where the claim was for a debt incurred by a building contractor to raise the necessary capital which had interest charges as one of its constituents. The reality was that every creditor who was deprived of funds to which he was entitled and which he needed to run his business would have to incur an interest-bearing loan or employ other funds which could themselves have earned interest. It was a short step to say that interest losses would arise 'in the ordinary course of things' in such circumstances. Further, the loss on the late payment of a debt might include an element of compound interest. But the claimant had to claim and prove his actual interest losses if he wished to recover compound interest, as was the case where the claim was for a sum which included interest charges. The claimant would have to show, if his claim was 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 was sought was short or where the claimant did not have to borrow money to replace the debt, simple interest under s. 35A of the Supreme Court Act 1981 was likely to be the more convenient remedy.

However, if the taxpayer was to escape from the six year limitation period, it had to pursue the alternative argument that the payments were made under a mistake. That was a restitutionary remedy. It could now be taken as settled that, under the Kleinwort Benson principle ([1999] 2 AC 349), a cause of action at common law was available for money paid under a mistake of law (see Deutsche Morgan Grenfell Group plc v IR Commrs [2006] BTC 781; [2007] 1 AC 558). Lords Hope and Nicholls considered that the court had jurisdiction at common law to award compound interest where the claimant sought a restitutionary remedy for the time value of money paid under a mistake. The unjust enrichment principle supported the free-standing cause of action to recover interest, which was the measure of the enrichment. It had not been suggested that a restitutionary award by way of interest would give rise to injustice, so long as it was appropriately calculated. Recognition that the court had jurisdiction to award compound interest at common law was a short, but logical, step in the further development of the restitutionary remedy. It followed from the fact that the right to recover money paid under a mistake was available at common law. To treat the choice of remedy in unjust enrichment as discretionary would be inconsistent with the common law right that gave rise to it.

The use of ordinary commercial rates of interest, at ordinary rates, would be appropriate if those rates were relevant to the enrichee's circumstances. But it was 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 could do that, then ordinary rates and other terms had to give way to those that were relevant to the circumstances of the enrichee.

The unusual position of the Revenue had been sufficiently demonstrated. Accordingly, the taxpayer'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.

Lord Walker preferred to extend the court's equitable jurisdiction to award compound interest. The discretionary nature of an equitable award of interest provided the necessary flexibility, and the principles for the exercise of the discretion could be developed along familiar and predictable lines. In this case either the common law route or the equitable route led to the same conclusion.

Lords Scott and Mance agreed 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. They could not agree, however, that the restitutionary remedy, allowed to a person who had made a payment under a mistake, could entitle the claimant to recover not only the payment but also interest thereon that the person under the obligation to make repayment had never received or to recover the value of an assumed benefit derived from the mistaken payment that that person had never in fact enjoyed. They considered as incorrect in principle the approach of Lords Nicholls and Hope, according to which a prima facie right would exist to recover a conventional or ‘objective’ measure of loss, which could then, to some uncertain extent, be qualified by the application of another principle identified in the case of Lord Nicholls as ‘subjective devaluation’. It was now too late to reverse the common law approach to restitution in respect of money had and received.

House of Lords.
Judgment delivered 18 July 2007.