Sempra v Inland Revenue

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Title:Sempra Metals Ltd(formerly

Metallgesellschaft Ltd)v Inland Revenue

Commissioners

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*561Sempra Metals Ltd(formerly Metallgesellschaft Ltd)v Inland Revenue

Commissioners and another

House of Lords

18July2007

[2007]UKHL34

[2008]1A.C.561

Lord Hope of Craighead,Lord Nicholls of Birkenhead,Lord Scott of Foscote,Lord Walker of

Gestingthorpe and Lord Mance

2006Nov1,2;2007May16;July18

Restitution—Unjust enrichment—Money had and received—Recovery of interest—Dividends paid by UK subsidiary to non-resident parent subjected to premature tax liability—Decision of European court that payments unlawful for restricting freedom of establishment—National court's computation of compensation for interest accruing during premature payment period—Whether simple or compound interest payable

Under provisions of the Income and Corporation Taxes Act1988,as in force until April1999, certain distributions made by companies resident in the United Kingdom were subject to advance corporation tax(“ACT”)which was payable quarterly.Tax so paid could later be set off against any liability to mainstream corporation tax(“MCT”).The legislation also provided that two companies resident in the United Kingdom,one of which owned at least51%of the other,could make a group income election,a consequence of which was that the subsidiary company was not obliged to account for advance corporation tax on dividends paid to the parent company.In March2001,the Court of Justice of the European Communities held that a tax regime allowing resident parent companies but not non-resident ones to receive dividends from their resident subsidiaries without payment of advance corporation tax created a cashflow disadvantage and was an unwarranted restriction on freedom of establishment and thus contrary to article52of the EC Treaty(article43EC).The court ordered that companies obliged to make advance payments of tax contrary to Community law should be entitled to an effective remedy to obtain reimbursement or reparation of the financial loss they have sustained or from which the authorities of the member state have benefited,the nature and basis of the remedy claimed being matters for them as claimants and for the national court.The claimant,a UK subsidiary of a German parent company,together with other multi-national companies acting under a group litigation order,claimed entitlement to restitution in respect of interest accruing on sums of tax prematurely paid during the period between making the payments and the date on which mainstream corporation tax became payable.The judge held that the taxpayer company was entitled to a full remedy restoring it to the position it would have been in had it not been required to make premature payments.Thus he ordered the award to be quantified on the basis of compound,not simple,interest at a rate derived from prevailing levels of interest rates in the market generally and to be the same for all claimants.The Court of Appeal dismissed the revenue's appeal and ordered that interest should be computed by compounding at the same periodic rests as those by which the applicable rate of interest was fixed.

On appeal by the revenue—

Held,dismissing the appeal,(1)that the anomalous and unprincipled exception,with regard to interest losses by way of damages for breach of contract to pay a debt,to the common law rule that damages are recoverable for losses caused by a breach of contract or tort should no longer be sanctioned;that,consequently,in principle it would always be open to a claimant to plead and prove his actual interest losses caused by late payment of a debt,which might include an element of compound interest;that such losses would be subject to the principles governing all claims for*562damages for breach of contract,such as remoteness and failure to mitigate;and that,accordingly,the courts had a common law jurisdiction to award interest,simple and compound,as damages on claims for non-payment of debts as well as on other claims for breach of contract and tort(post,paras16–17,74,89,92,94–97,100,132,151,165,215–217).

London,Chatham and Dover Railway Co v South Eastern Railway Co[1893]AC429,HL(E)and President of India v La Pintada Cia Navigacion SA[1985]AC104,HL(E)not followed.

(2)That a court had jurisdiction to award compound interest where a claimant was seeking restitution of money paid under mistake;that such an award could be made(per Lord Hope of Craighead,Lord Nicholls of Birkenhead and Lord Scott of Foscote)in the exercise of the court's common law restitutionary jurisdiction,or(per Lord Walker of Gestingthorpe and Lord Mance)in the exercise of the court's discretionary equitable jurisdiction;that(per Lord Hope of Craighead, Lord Nicholls of Birkenhead and Lord Walker of Gestingthorpe)in the case of personal restitution the money award reversing unjust enrichment had to take into account the value of the use of the money over the time during which it had been retained by the defendant,which(per Lord Hope of Craighead and Lord Nicholls of Birkenhead)was prima facie the reasonable cost to the claimant of borrowing the same sum over the same period unless the defendant could show that he had in fact gained no such benefit himself;and that(per Lord Scott of Foscote and Lord Mance)only if the money had been proved to have actually earned interest in the hands of the defendant would the claimant be entitled to recover any interest(post,paras24,26,33–35, 111–119,132,151,153–154,178,183–187,231,233–241).

Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996]AC669, HL(E)departed from.

(3)That(per Lord Hope of Craighead,Lord Nicholls of Birkenhead and Lord Walker of Gestingthorpe)the assumption that the Government had derived some benefit from the premature payment of the tax had not been displaced;that,however,the Government was in a different position from ordinary commercial borrowers and could borrow money at more favourable rates;and that,accordingly,the claimant'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(post,paras48–50,117–118,127–128,188).

Decision of the Court of Appeal[2005]EWCA Civ389;[2006]QB37;[2005]3WLR521affirmed .

The following cases are referred to in the speeches of their Lordships:

Aldora,The[1975]QB748;[1975]2WLR791;[1975]2All ER69

Amministrazione delle Finanze dello Stato v SpA San Giorgio(Case199/82)[1983]ECR 3595,ECJ

Arnott v Redfern(1826)3Bing353

Attorney General v Blake[2001]1AC268;[2000]3WLR625;[2000]4All ER385,HL(E)

Attorney General for Hong Kong v Reid[1994]1AC324;[1993]3WLR1143;[1994]1All ER 1,PC

BP Exploration Co(Libya)Ltd v Hunt(No2)[1979]1WLR783;[1983]2AC352;[1982]2 WLR253;[1982]1All ER925,HL(E)

Bayne v Stephens(1908)8CLR1

Blue Circle Industries plc v Ministry of Defence[1999]Ch289;[1999]2WLR295;[1998]3All ER385,CA

Brandeis Goldschmidt&Co Ltd v Western Transport Ltd[1981]QB864;[1981]3WLR181;

[1982]1All ER28,CA*563*564

Brasserie du Pêcheur SA v Federal Republic of Germany(Joined Cases C-46/93and C-48/93)[1996]QB404;[1996]2WLR506;[1996]All ER(EC)301;[1996]ECR I-1029,ECJ Carmichael v Caledonian Railway Co(1870)8M(HL)119,HL(Sc)

Commonwealth of Australia v SCI Operations Pty Ltd(1998)192CLR285

Cornwall v Rowan(No2)[2005]SASC122

Corus UK Ltd v Commission of the European Communities(Case T-171/99)[2002]1WLR 970;[2001]ECR II-2967,CFI

Credit Lyonnais v George Stevenson&Co Ltd(1901)9SLT93

Czarnikow(C)Ltd v Koufos[1969]1AC350;[1967]3WLR1491;[1967]3All ER686,HL(E)

De Bernales v Fuller(1810)2Camp426

De Havilland v Bowerbank(1807)1Camp50

Depcke v Munn(1828)3C&P112

Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs[2006]UKHL49;[2007]1AC 558;[2006]3WLR781;[2007]1All ER449,HL(E)

Dilexport Srl v Amministrazione delle Finanze dello Stato(Case C-343/96)[1999]ECR I-579, ECJ

Diplock,In re[1948]Ch465;[1948]2All ER318,CA

Dutch v Warren(1721)1Stra406;2Burr1005,1011

Experience Hendrix LLC v PPX Enterprises Inc[2003]EWCA Civ323;[2003]1All ER (Comm)830,CA

Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd[1943]AC32;[1942]2All ER 122,HL(E)

Frühling v Schroeder(1835)2Bing NC77

Garden Cottage Foods Ltd v Milk Marketing Board[1984]AC130;[1983]3WLR143;[1983] 2All ER770,HL(E)

Gittins v Steele(1818)1Swanst199

Hadley v Baxendale(1854)9Exch341

Harsant v Blaine Macdonald&Co(1887)56LJQB511,CA

Hartle v Laceys[1999]Lloyd's Rep PN315,CA

Heydon v NRMA Ltd(No2)(2001)53NSWLR600

Hungerfords v Walker(1989)171CLR125

IM Properties plc v Cape&Dalgleish[1999]QB297;[1998]3WLR457;[1998]3All ER203, CA

Inverugie Investments Ltd v Hackett[1995]1WLR713;[1995]3All ER841,PC

Johnson v The King[1904]AC817,PC

Kleinwort Benson Ltd v Lincoln City Council[1999]2AC349;[1998]3WLR1095;[1998]4All ER513,HL(E)

Lipkin Gorman v Karpnale Ltd[1991]2AC548;[1991]3WLR10;[1992]4All ER512,HL(E)

London,Chatham and Dover Railway Co v South Eastern Railway Co[1893]AC429,HL(E)

Margrie Holdings Ltd v City of Edinburgh District Council1994SC1

Maria Anna and Steinbank Coal and Coke Co,In re(McKewan's Case)(1877)6Ch D447

Marshall v Southampton and South West Hampshire Health Authority(Teaching)(No2) (Case C-271/91)[1994]QB126;[1993]3WLR1054;[1993]4All ER586;[1993]ECR I-4367 ,ECJ

Mediana,The[1900]AC113,HL(E)

Metallgesellschaft Ltd v Inland Revenue Comrs(Joined Cases C-397and C-410/98)[2001] Ch620;[2001]2WLR1497;[2001]All ER(EC)496;[2001]STC452;[2001]ECR I-1727, ECJ

Ministry of Defence v Ashman[1993]2EGLR102,CA

Minter(F G)Ltd v Welsh Health Technical Services Organisation(1980)13BLR1,CA*564 Morgan Guaranty Trust Co of New York v Lothian Regional Council1995SC151

Mortgage Corpn v Halifax(SW)Ltd[1999]Lloyd's Rep PN159

Moses v Macferlan(1760)2Burr1005

NEC Semi-Conductors Ltd v Inland Revenue Comrs[2006]EWCA Civ25;[2006]STC606, CA

National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd(unreported)23April1997, NSWCA

Nigerian National Shipping Lines Ltd v Mutual Ltd(The Windfall)[1998]2Lloyd's Rep664 Nightingal v Devisme(1770)5Burr2589

Nykredit Mortgage Bank plc v Edward Erdman Group Ltd(formerly Edward Erdman(an unlimited company))(No2)[1997]1WLR1627;[1998]1All ER305,HL(E)

Page v Newman(1829)9B&C378

Penarth Dock Engineering Co Ltd v Pounds[1963]1Lloyd's Rep359

Pirelli Cable Holding NV v Inland Revenue Comrs[2003]EWCA Civ1849;[2004]STC130, CA

Practice Statement(Judicial Precedent)[1966]1WLR1234;[1966]3All ER77,HL(E) President of India v La Pintada Cia Navigacion SA[1985]AC104;[1984]3WLR10;[1984]2 All ER773,HL(E)

President of India v Lips Maritime Corpn[1985]2Lloyd's Rep180;[1988]AC395;[1987]3 WLR572;[1987]3All ER110,HL(E)

R v Secretary of State for Social Security,Ex p Sutton(Case C-66/95)[1997]ICR961;[1997] ECR I-2163,ECJ

R v Secretary of State for Transport,Ex p Factortame Ltd(No7)[2001]1WLR942

Rees&Kirby Ltd v Swansea City Council(1985)30BLR1,CA

Roads and Traffic Authority v Ryan(No2)[2002]NSWCA91

Rodger v Comptoir d'Escompte de Paris(1871)LR3PC465,PC

Rogers v Ingham(1876)3Ch D351,CA

Roquette Frères,Sociétév Commission of the European Communities(Case26/74)[1976] ECR677,ECJ

Shilliday v Smith1998SC725

Sinclair v Brougham[1914]AC398,HL(E)

Swingcastle Ltd v Alastair Gibson[1991]2AC223;[1991]2WLR1091;[1991]2All ER353, HL(E)

Trans Trust SPRL v Danubian Trading Co Ltd[1952]2QB297;[1952]1All ER970,CA Wadsworth v Lydall[1981]1WLR598;[1981]2All ER401,CA

Walker v Constable(1798)1Bos&P306

Wallersteiner v Moir(No2)[1975]QB373;[1975]2WLR389;[1975]1All ER849,CA

Watson Laidlaw&Co Ltd v Pott Cassels&Williamson(1914)31RPC104,HL(Sc)

Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1994]4All ER 890;[1994]1WLR938;[1994]4All ER890,CA;[1996]AC669;[1996]2WLR802;[1996]2 All ER961,HL(E)

Whitwham v Westminster Brymbo Coal and Coke Co[1896]2Ch538,CA

Woolwich Equitable Building Society v Inland Revenue Comrs[1993]AC70;[1992]3WLR 366;[1992]3All ER737,HL(E)

The following additional cases were cited in argument:

AFCon Management Consultants v Commission of the European Communities(Case T-160/03)[2005]ECR II-981,CFI

Autologic Holdings plc v Inland Revenue Comrs[2005]UKHL54;[2006]1AC118;[2005]3 WLR339;[2005]4All ER1141;[2005]STC1357,HL(E)

Financial Institutions Services Ltd v Negril Negril Holdings Ltd[2004]UKPC40*565

Francovich v Italian Republic(Joined Cases C-6/90and C-9/90)[1995]ICR722;[1991]ECR I-5357,ECJ

Merchant Banking Co v Maud(1874)LR18Eq659

R v Secretary of State for Transport,Ex p Factortame Ltd(No2)(Case C-213/89)[1991]1AC 603;[1990]3WLR818;[1991]1All ER70,ECJ and HL(E)

SmithKline Beecham plc v Apotex Europe Ltd[2006]EWCA Civ658;[2007]Ch71;[2006]3 WLR1146;[2006]4All ER1078,CA

SocietàIndustriale Metallurgica di Napoli(Simet)v Commission of the European Communities (Case67/69)[1971]ECR197,ECJ

Victoria Laundry(Windsor)Ltd v Newman Industries Ltd[1949]2KB528;[1949]1All ER 997,CA

APPEAL from the Court of Appeal

This was an appeal,brought with permission of the House(Lord Nicholls of Birkenhead,Lord Hope of Craighead and Lord Brown of Eaton-under-Heywood)granted on28July2005,by the Inland Revenue Commissioners and the Attorney General,from a decision of the Court of Appeal (Chadwick,Laws and Jonathan Parker LJJ)dated12April2005dismissing their appeal from a decision of Park J dated16June2004whereby he had awarded compound interest to the claimant, Sempra Metals Ltd(formerly Metallgesellschaft Ltd).

The facts are stated in the opinion of Lord Nicholls of Birkenhead.

Ian Glick QC,Rupert Baldry and Gerry Facenna for the revenue.[Submissions were made at the outset on whether the case should be referred to the Court of Justice of the European Communities.] It is clear from Metallgesellschaft Ltd v Inland Revenue Comrs(Joined Cases C-397and C-410/98) [2001]Ch620,para96that the rate of interest to be awarded is a matter for the national court and whether it is compound or simple interest is a matter for the national court.In most European states compound interest is not granted.Consequently,simple interest provides an effective remedy for the loss of use of money.In general the European court leaves remedy to the national court subject only to equivalence and effectiveness,otherwise national courts have total autonomy:see R v Secretary of State for Transport,Ex p Factortame Ltd(No2)(Case C-213/89)[1991]1AC603and Francovich v Italian Republic(Joined Cases C-6/90and C-9/90)[1995]ICR722.It is clear that the national court is to adapt laws rather than create new remedies.There is no support for Chadwick LJ's view that English law must yield in its entirety to provide an effective remedy.

Marshall v Southampton and South West Hampshire Health Authority(Teaching)(No2)(Case C-271/91)[1994]QB126is of considerable importance and the points to notice are these.First,the

loss and damage actually sustained had to be made good in accordance with the applicable national rules.Second,one of the factors to be taken into account in assessing that loss and damage was the time value of money.Third,it follows that the claimant was entitled to interest as an essential component of her compensation,not an additional award.Fourth,such interest was to be awarded in accordance with the applicable national rules,which gave the claimant simple interest.Brasserie du Pêcheur SA v Federal Republic of Germany(Joined Cases C-46/93and C-48/93)[1996]QB404 shows that,in the context of loss of profits,if the damage was too remote that was purely a*566 matter of English law.European law is only engaged if there is discrimination against non-UK claimants.

Under English law,in tort,where a claimant has suffered financial loss,the only way he can generally recover money for time lost is an award of simple interest under section35A of the Supreme Court Act1981(inserted by the Administration of Justice Act1982,section15(1),Schedule1,Part I),which should be applied by analogy in this case.It is agreed that the failure to implement article43EC of the EC Treaty is a tort.

In awarding compound interest to the claimant the Court of Appeal departed from the general position under national law.The general rule under the common law is that a court has no power to award interest,simple or compound:see London,Chatham and Dover Railway Co v South Eastern Railway Co[1893]AC429.In equity,a court has a general discretion to award simple interest,but an award of compound interest is limited to two special classes of case,fraud and misapplication by a fiduciary: see President of India v La Pintada Cia Navigacion SA[1985]AC104.In the La Pintada case the House declined to reverse the decision in the London,Chatham and Dover Railway case either so as to give interest on sums paid before the commencement of proceedings or so as to give compound interest.Similarly in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996]AC669the House rejected the possibility of awarding compound interest on debts by use of an equitable power.In both cases one of the main reasons was that the power to award interest would co-exist uneasily with the statutory power under the1981Act and that any extension of the power would be usurping the function of Parliament:see the La Pintada case[1985]AC104,130; the Westdeutsche case[1996]AC669,717and President of India v Lips Maritime Corpn[1988]AC 395,424.

The development of the law on interest was comprehensively reviewed by the Law Commission in Compound Interest:A Consultation Paper(2002)(No167)which provisionally proposed that a power to award compound interest should be introduced and that section35A should be amended to state that any interest awarded should be compounded unless there are good reasons to the contrary:see Part V.The paper concluded that there was no need for statutory reform of the practice under the equitable jurisdiction:para 5.10.Since the decision in the Westdeutsche case[1996]AC669 Parliament has enacted further limited measures creating a statutory entitlement to interest:see Arbitration Act1996and Late Payment of Commercial Debts(Interest)Act1998.As yet,however,no steps have been taken by Parliament to amend section35A or otherwise to implement the Law Commission's proposals.Therefore,as English law currently stands,the courts do not have power to award compound interest save in the two special cases of fraud and misapplication by a fiduciary. Furthermore,unless and until Parliament implements the Law Commission's proposals,the reasoning in the La Pintada case[1985]AC104and the Westdeutsche case[1996]AC669applies with equal force today and the House should not,in this case,change the settled law.

If,as a result of the decision in Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs[2007] 1AC558,the claimant is entitled to bring a claim for restitution analogous to the claim in Woolwich Equitable Building Society v Inland Revenue Comrs[1993]AC70,based on its own mistake of*567 law,that claim should take effect as a remedy of national law and compound interest should not be awarded.In Johnson v The King[1904]AC817the Privy Council effectively applied the London, Chatham and Dover Railway case[1893]AC429to a restitutionary claim.The question of how interest can be recovered was answered in BP Exploration Co(Libya)Ltd v Hunt(No2)[1979]1 WLR783which established,and it has been accepted ever since,that in restitutionary claims,along with other common law claims,one gets interest under the statutory provision,now section35A of the 1981Act.That is the footing on which the Woolwich case[1993]AC70was approached.The Westdeutsche case[1996]AC669is inconsistent with a claimant recovering in restitution for a gain made or assumed.That is the answer as to how the La Pintada case[1985]AC104affects restitution claims.Directly it does not,but the law in restitution has developed in much the same way and for much the same reason,and at common law in restitution the position as it now stands is:if a claimant wants to recover for the loss of the use of the money whereby the defendant has been enriched, except in cases of fraud,his only remedy is to rely on section35A of the1981Act.A claimant who

seeks to recover a sum of money in restitution at common law,or who seeks to recover an equivalent sum by way of damages in tort,does not have a remedy either at common law or in equity for loss of use of the money from the time it was paid away until judgment.His right to compensation is to seek an award of interest under section35A.

The central question to this case is whether interest under section35A is an equivalent remedy and whether it is an effective remedy.It is certainly an equivalent remedy because that is what the taxpayer got in the Woolwich case[1993]AC70and it is unthinkable that the European court would regard simple interest as an ineffective remedy.The court regards the payment of compound interest as exceptional:see Corus UK Ltd v Commission of the European Communities(Case T-171/99) [2002]1WLR970,para60and SocietàIndustriale Metallurgica di Napoli(Simet)v Commission of the European Communities(Case67/69)[1971]ECR197.For an analogy with the approach under English law:see Victoria Laundry(Windsor)Ltd v Newman Industries Ltd[1949]2KB528,539.That view of European law is supported by Lord Nicholls of Birkenhead in Autologic Holdings plc v Inland Revenue Comrs[2006]1AC118,paras24–25.

For further examples of the English courts'approach:see Wadsworth v Lydall[1981]1WLR598; Brandeis Goldschmidt&Co Ltd v Western Transport Ltd[1981]QB864;Swingcastle Ltd v Alastair Gibson[1991]2AC223;IM Properties plc v Cape&Dalgleish[1999]QB297;Hartle v Laceys [1999]Lloyd's Rep PN315;Blue Circle Industries plc v Ministry of Defence[1999]Ch289;Nigerian National Shipping Lines Ltd v Mutual Ltd(The Windfall)[1998]2Lloyd's Rep664and Mortgage Corpn v Halifax(SW)Ltd[1999]Lloyd's Rep PN159.

Laurence Rabinowitz QC and Francis Fitzpatrick for the claimant.[Submissions were made on whether the case should be referred to the Court of Justice.]

The claimant should have a full remedy not a partial one.The revenue are wrong to say that the application of English law means the claimant should get less than full compensation.

*568

The general principles of Community law laid down by the revenue are not https://www.doczj.com/doc/023259244.html,munity law, absent special considerations,leaves remedy to domestic law.However in Metallgesellschaft Ltd v Inland Revenue Comrs(Joined Cases C-397and C-410/98)[2001]Ch620,paras,77,87-89, 93–96,the Court of Justice laid down the precise remedies to which the claimant is entitled,namely, both a restitutionary remedy and a damages remedy.The court also expressly rejected the revenue's suggestion that remedy was to be left totally to English law as it concerned the claimant's Community law right and was not,therefore,merely an ancillary matter.The effect is that if national law does not provide full compensation then national law should be adapted.The Court of Justice's decision is clear and conclusive:full compensation is required.

The revenue concede that point but say that full compensation does not mean full indemnification for loss.The revenue's reliance on Marshall v Southampton and South West Hampshire Health Authority (Teaching)(No2)(Case C-271/91)[1994]QB126is misplaced.Two propositions can be derived from that case:(i)the compensation to be provided for the primary loss suffered must be no less than that sustained and one cannot rely on national conditions to reduce the compensation below that level;(ii)once that loss is ascertained you must take into account the effluxion of time and award interest.The award of interest in that case was,however,an ancillary matter.The revenue's approach in this case does not satisfy the principle laid down in the Marshall case.

Far from being hostile to compound interest the European court has been willing to consider and, indeed,make such an award:see Corus UK Ltd v Commission of the European Communities(Case T-171/99)[2002]1WLR970;AFCon Management Consultants v Commission of the European Communities(Case T-160/03)[2005]ECR II-981;SocietàIndustriale Metallurgica di Napoli(Simet)v Commission of the European Communities(Case67/69)[1971]ECR197and commission communication on the interest rates to be applied when aid granted unlawfully is being recovered (2003/C110/08)(OJ2003C110,p21).

Under English law there is no reason why the losses actually sustained by the claimant should not be fully restored because the charge to interest actually paid involved an element of compounding. Although English law does contain a number of restrictions on the jurisdiction of the court to award interest,including compound interest,those restrictions are generally recognised as unjust and unfair. More particularly,it is generally recognised that an award of compound interest is ordinarily the only way properly to compensate someone for loss of the time value of money.The history of this area of the law is one of the courts seeking to minimise,and not extend,the application of those restrictions

wherever they can.The restrictions that exist do not apply,and have never applied,to claims in tort for actual loss incurred by the claimant as a result of an interest charge actually incurred by reason of a defendant's breach of obligation.Although there is high authority that one cannot obtain interest in respect of a claim in restitution on a compound basis,there are exceptions to this,and such authority as there is applies only to claims where the interest claimed is ancillary to the primary loss claimed. The English common law only recognises a right to an award of interest in respect of a late paid debt or damages in limited circumstances,a right to an*569award of compound interest is recognised in even more limited circumstances.The restrictions on the award of interest generally are largely attributable to the much criticised decision in Page v Newman(1829)9B&C378.The restriction on the award of interest on a compound basis appears to be attributable to wholly outmoded views about usury and the wrongfulness of money lending.English law's treatment of claims for interest remains seriously inadequate,hampered by19th century common law authority generally regarded as of dubious merit and only limited interventions by the legislature towards remedying the obvious problems which exist:see London,Chatham and Dover Railway Co v South Eastern Railway Co [1893]AC429;President of India v La Pintada Cia Navigacion SA[1985]AC104;Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996]AC669;Pre-Judgment Interest on Debts and Damages(2004)(Law Com No287);Discussion Paper on Interest on Debt and Damages(2005)(Scottish Law Com Discussion Paper No127);Mann,“On interest,compound interest and damages”(1985)101LQR30.In those circumstances the House should seek,at the least,to ensure that existing restrictions are confined as far as possible.

Even in contract the restrictions on the award of damages for late payment of damages or a debt have their limits:see Hadley v Baxendale(1854)9Exch341;Trans Trust SPRL v Danubian Trading Co Ltd[1952]2QB297and Wadsworth v Lydall[1981]1WLR598.However,the restrictions in English law on the recovery of interest and in particular compound interest do not apply,and have never applied,to a claim in tort for compensation in respect of an actual loss incurred by a claimant as a breach of duty by the defendant.The interest is simply recovered as damage flowing from the breach of duty concerned.Thus,where a claimant can prove actual loss consisting of compound interest flowing from a breach of a common law duty of care such loss is recoverable:see Brandeis Goldschmidt&Co Ltd v Western Transport Ltd[1981]QB864;Swingcastle Ltd v Alastair Gibson [1991]2AC223;Nigerian National Shipping Lines Ltd v Mutual Ltd(The Windfall)[1998]2Lloyd's Rep664;Mortgage Corpn v Halifax(SW)Ltd[1999]Lloyd's Rep PN159;IM Properties plc v Cape& Dalgleish[1999]QB297;Hartle v Laceys[1999]Lloyd's Rep PN315and Blue Circle Industries plc v Ministry of Defence[1999]Ch289.None of those cases supports the idea that tort claims must also fall within the second limb of Hadley v Baxendale(1854)9Exch341.

Similarly,those restrictions do not extend to a claim to recover compound interest in respect of restitution.Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996]AC 669presents no obstacle to the claim in the present case as it is not a claim for interest ancillary to a restitutionary claim for repayment of a principal amount but is itself the principal claim.The Westdeutsche case is not applicable to such a claim.So too President of India v La Pintada Cia Navigacion SA[1985]AC104presents no obstacle to the claim because a claim in restitution is not a claim as a creditor on a debt or for damages for compensation for loss arising from breach of contract:see NEC Semi-Conductors Ltd v Inland Revenue Comrs[2006]STC606and Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs[2007]1AC558.Johnson v The King[1904]AC 817was wrongly decided as it builds on the London,Chatham and Dover Railway case[1893]AC 429.

*570

Consequently,it is only by an extension of existing law from contract to tort and restitution that English law would prohibit a claim for recovery of compound interest on a claim for an actual loss suffered because of a tort or a claim in restitution.That would not be a correct direction in which to take English law.

Glick QC in reply.In Marshall v Southampton and South West Hampshire Health Authority(Teaching) (No2)(Case C-271/91)[1994]QB126the European court did not approach interest as if it were ancillary.Plainly it was not so.

24January2007.By letter to the parties their Lordships invited written submissions on the following three questions,which arose on the assumption that the nature and measure of any recovery in restitution fell to be treated as matters of pure domestic law.

“1Whether the House should now(notwithstanding its decision in Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996]AC669and earlier cases such as Walker v Constable(1798)1Bos&P306and Frühling v Schroeder(1835)2Bing NC77)recognise a right to claim restitution(or‘disgorgement’)of any interest,including any compound interest,which the revenue may have earned or saved by having received and held advance corporation tax(‘ACT’)for the periods they did in circumstances where such ACT was at all times liable to be recouped under the principle in Woolwich Equitable Building Society v Inland Revenue Comrs[1993]AC70and/or Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs[2007]1AC558.

“2If so,whether the House should do so by treating any such interest earned or saved as no different from the principal sum of ACT and accordingly as recoverable as of right at common law(subject to defences such as change of position),or whether it should do so by recognising an equitable and discretionary remedy of the nature accepted by the minority,though rejected by the majority,in the Westdeutsche case[1996]AC669.

“3The consequences,on the particular facts of this case,of recognising such a claim to restitutionary interest…”

Ian Glick QC,Rupert Baldry and Gerry Facenna for the revenue.In the present state of English law a claimant has a personal claim at common law for repayment of a principal sum of money together with interest under section35A of the1981Act.A claimant payer has no right in restitution to disgorgement of interest earned or saved by the defendant payee on the sum while it was liable to be repaid.The early authorities are clear on this point:see Walker v Constable1Bos&P306;Moses v Macferlan(1760)2Burr1005and Frühling v Schroeder2Bing NC77.This has remained the case ever since,as is clear from such cases as Johnson v The King[1904]AC817and Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996]AC669.

There are four possible ways in which such a right to disgorgement of interest earned or saved might be recognised in English law.

One,a proprietary claim in equity,which would treat the money paid as being subject to a resulting or constructive trust in favour of the claimant payer.In the Westdeutsche case the House was unanimous in agreeing that the claimant had no such claim.

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Two,a proprietary claim at common law,on the basis that legal and equitable title to the money remains vested in the claimant payer while the money is in the hands of the defendant payee.This would allow a claimant payer to trace his money,and the product of the money,in the hands of the defendant payee.The primary difficulties with recognising such a claim are:that it is inconsistent with the principles traditionally underlying the law of unjust enrichment in English law;that it is impossible in practice for such a claim to succeed where the claimant payer's money has been mixed with other money;and that precisely the same difficulties would arise in insolvency as were identified in the Westdeutsche case in relation to an equitable proprietary claim.

Three,a personal claim at common law,which treats interest earned or saved as no different from the principal sum,and therefore recoverable as of right as a form of“secondary enrichment”that the payee has obtained through receipt or use of the principal sum.The introduction of such a claim would involve a fundamental repositioning as to the conceptual basis of unjust enrichment in English law.Unjust or“unjustified”enrichment in civilian and certain mixed legal systems,including Scotland, tends to be based on a broad equitable approach by reference to the maxim nemo debet locupletari aliena jactura—no one ought to be enriched by another's loss.The focus on the extent of the enrichment approach is reflected in the preference in those systems for the term“unjustified”rather than“unjust”.By contrast in English law there is no such general concept similar to the civilian condictio indebiti:see Woolwich Equitable Building Society v Inland Revenue Comrs[1993]AC70, 172;Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs[2007]1AC and Burrows,The Law of Restitution,2nd ed(2002),pp48–50.For the approach in Scotland:see Morgan Guaranty Trust Co of New York v Lothian Regional Council1995SC151and Shilliday v Smith1998SC725. Although it was open to the House to shift the law to bring it closer to the position in Scotland it would not be an appropriate direction in which to develop the common law.The recognition of such a claim is unnecessary and is likely simply to confuse the boundary between personal and proprietary remedies.Even if a shift in the foundation of the English law of unjust enrichment were desirable or inevitable this was not an appropriate moment for such a step:see Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs[2007]1AC558,paras155–157.If a personal restitutionary claim for

disgorgement is to be recognised it would be necessary to find some principled basis on which the law could provide for disgorgement in a case like the present one but not in the case of defaulting debtors:see the Westdeutsche case[1996]AC669,740.It is not clear on what basis such a distinction could be arrived at.Moreover,there was the practical consideration that in every disgorgement claim there would have to be an investigation of what had happened to the money once paid over to the defendant.Once that investigation had been completed the court would need to consider whether it was justified for the defendant to retain the resulting enrichment.The alternative to an investigation would be for the law to deem interest to have been earned at some conventional rate regardless of the facts of the individual case.That would be an exercise similar to that in practice carried out under section35A,which underlined the fact that to follow such a course would*572 involve judicial legislation in an area that had already been addressed by Parliament.

Four,by way of an equitable discretionary remedy of the nature accepted by the minority in Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996]AC669.The majority in that case rejected any extension of the equitable jurisdiction because the point had not been fully argued and because,following the reasoning of Lord Brandon of Oakbrook in President of India v La Pintada Cia Navigacion SA[1985]AC104,129–130,to extend the power to award compound interest would usurp the function of Parliament.The majority therefore affirmed the decisions in the La Pintada case and London,Chatham and Dover Railway Co v South Eastern Railway Co[1893]AC429.Given that the Law Commission has since proposed new legislation which would allow the courts to award compound interest,whether or not that power should be granted is now,more than ever,a matter for Parliament.

The personal common law action for money had and received is not inadequate.It enables a claimant to recover the whole amount he has paid over to the defendant.In addition,the claimant is entitled to a discretionary remedy in the form of interest.That remedy is derived from statute,however,and it is not the function of the equitable jurisdiction to improve the statutory remedy.In the present case as in the Westdeutsche case[1996]AC669there is no separate equitable cause of action.The claimant has a personal common law cause of action for money had and received.If the minority in the Westdeutsche case are now followed equity,in its auxiliary jurisdiction,would give that claimant a further remedy in a personal action for restitution.Consequently,an additional equitable entitlement to interest on damages would not be equity acting in aid of the common law.

The reasons adopted by the majority in the Westdeutsche case[1996]AC669for not extending the equitable jurisdiction to provide for a discretionary award of interest in a common law action for money had and received are good ones and that decision should not be departed from.However,if the House were minded to recognise a right to disgorgement of interest,then an extension by way of the equitable discretionary jurisdiction,as favoured by the minority in the Westdeutsche case,would at least ensure that an automatic common law remedy as of right is not created.

[Submissions were made on the facts.]

Laurence Rabinowitz QC,Francis Fitzpatrick and Steven Elliott for the claimant.It has long been established that where a defendant has unjustly enjoyed the use of the claimant's land or chattels over a period of time the common law requires that he pay a sum representing the reasonable value of that period of use:see Attorney General v Blake[2001]1AC268.In modern times awards of this type have come to be understood as a species of restitution:see Ministry of Defence v Ashman [1993]2EGLR102.The point of principle is that the enrichment a defendant gains by having the use of a claimant's money for a period of time should not be treated any differently from the enrichment a defendant gains by having the use of a claimant's land or chattels.The time value of money is an enrichment within the principle of unjust enrichment.The nominal value of money is an artificial and incomplete measure of the enrichment a defendant gains through a receipt of money:see*573 Woolwich Equitable Building Society v Inland Revenue Comrs[1993]AC70,197;Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1994]4All ER890,954and NEC Semi-Conductors Ltd v Inland Revenue Comrs[2006]STC606.In point of principle the time value of money ought to be recoverable as substantive restitutionary relief.The question is whether this principled conclusion is precluded by authority.The modern law of unjust enrichment finds its roots in equity and the common law and,to a more limited extent,in admiralty.

So far as equity is concerned the position has always been quite simple.The courts of equity have always exercised an inherent jurisdiction to give interest on sums a defendant is directed to return, that interest typically running over the period during which the defendant enjoyed the use of the money in question.The inherent equitable jurisdiction to give interest on restitutionary awards is not

confined to cases involving trustees and fiduciaries of other types.The position in admiralty is no different although it was only articulated in The Aldora[1975]QB748.

The development of the common law has been less straightforward and the approach taken has been fundamentally inconsistent.The first reported decision to consider the availability of interest was Walker v Constable1Bos&P306which considered the point to be concluded by the authority of Moses v Macferlan2Burr1005.However the most that can be said about Moses v Macferlan is that the report does not indicate that interest was given.It does not indicate that interest was not given, nor that interest was claimed,nor that the availability of interest was argued.The decision in Walker v Constable1Bos&P306was subject to sharp criticism almost immediately:see Evans,“An Essay on the Action for Money Had and Received”(1802),reprinted[1998]RLR3.Regrettably,Walker v Constable was followed in a number of decisions over the course of the next four decades:see De Havilland v Bowerbank(1807)1Camp50;De Bernales v Fuller(1810)2Camp426;Depcke v Munn(1828)3C&P112and Frühling v Schroeder2Bing NC77.

However,the rule came to be subject to a number of important exceptions which eroded the extent of its application.First,interest could be given on money obtained and retained by fraud:see Johnson v The King[1904]AC817.Second,though the scope of the exception is uncertain,it appears that interest was recoverable if it were proved that the defendant had used the money and that interest had actually been earned:see De Havilland v Bowerbank1Camp50and Johnson v The King[1904] AC817.Third,following the Judicature Act1873(36&37Vict c66)it was held that interest might be recovered in an action for money had and received where the facts might equally have supported a claim in equity:see Harsant v Blaine Macdonald&Co(1887)56LJQB511.The present case falls within that exception.In any event it appears that the Walker v Constable1Bos&P306line of authority might be losing whatever hold it continues to exercise in the modern law:see Financial Institutions Services Ltd v Negril Negril Holdings Ltd[2004]UKPC40.Outside of the action for money had and received,the courts have held that interest may be given as an element of restitution where money is paid pursuant to a judicial decision which is subsequently reversed on appeal:see Rodger v Comptoir d'Escompte de Paris(1871)LR3PC465;Merchant Banking Co v Maud(1874) LR18Eq659and SmithKline Beecham plc v Apotex Europe Ltd[2007]Ch71.

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Accordingly,if the decision in Walker v Constable1Bos&P306is still good law then the common law's approach to awarding the time value of money in restitution cases is inconsistent with the approach of the law in other restitution cases and greatly at odds with the approach taken in the sister jurisdictions of equity and admiralty:see Burrows,“We Do This At Common Law But That In Equity”(2002)22OJLS1,15.Perhaps most fundamentally,the Walker v Constable line of authorities cannot be reconciled with the plain fact that the time value of money is an enrichment as much as the receipt of the principal sum.The authorities do not preclude the House from arriving at the principled conclusion that the time value of money may be given in a claim for restitution,whether on the basis that the vitality of Walker v Constable has long since been spent or that the time has finally come to overrule it along with the other cases in its line.A move in such a direction would not be a novel step as both the New South Wales Court of Appeal and Full Court of the Supreme Court of South Australia have concluded that the time value of money may be awarded at common law by way of restitution for unjust enrichment:see National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (unreported)23April1997;Heydon v NRMA Ltd(No2)(2001)53NSWLR600;Roads and Traffic Authority v Ryan(No2)[2002]NSWCA91;Cornwall v Rowan(No2)[2005]SASC122and Commonwealth of Australia v SCI Operations Pty Ltd(1998)192CLR285.

There are three alternative routes by which English law could recognise a claim for the time value of money.The first,and most natural route,is by holding that the time value of money is an enrichment and as such recoverable by way of substantive restitutionary relief at common law,overruling the Walker v Constable1Bos&P306line of cases if necessary.On this basis,a claim to the time value of money would be susceptible to the usual defences that may be raised to a restitutionary claim including change of position.The second is by adopting the approach of the minority in the Westdeutsche case[1996]AC669,holding that equitable interest may be given upon a principal sum recoverable in a claim for restitution irrespective of the jurisdiction to which the claim traces its provenance.The reasoning of the minority is compelling.Following their approach would not involve usurping the role of the legislature as it would merely be extending the equitable power to its natural boundary.By contrast with the first route,there would be no defence of change of position but there would be an equitable discretion.The third route to the same result is by holding that equitable interest may be given in the present case by dint of the fact that the restitutionary claims are claims

which,before the Judicature Act1873,could have been pursued in equity.Equitable interest is available on this ground without the House having to overrule the majority in the Westdeutsche case. If the House is minded to follow the first route the question arises as to the measurement of the time value of money.The first point to note is that the remedial concept is restitution,which is concerned with the defendant's claim at the claimant's expense,rather than compensation which focuses on the claimant's loss.Nor is the gain to be measured in terms of disgorgement as in Attorney General v Blake[2001]1AC268.The purpose of awards of that type is generally deterrence or the vindication of property rights.The principle applied in cases involving the“user principle”is neither*575 compensation nor disgorgement but instead restitution of the defendant's enrichment at the claimant's expense:see Watson Laidlaw&Co Ltd v Pott Cassels&Williamson(1914)31RPC104;Experience Hendrix LLC v PPX Enterprises Inc[2003]1All ER(Comm)830;Whitwham v Westminster Brymbo Coal and Coke Co[1896]2Ch538and Inverugie Investments Ltd v Hackett[1995]1WLR713.The same principles ought to govern the measurement of the time value of money given by way of restitution for unjust enrichment;see Heydon v NRMA Ltd(No2)53NSWLR600.The question whether the time value element of a restitutionary award should reflect the effect of compounding resolves itself into a simple question:whether,in any particular case,the price of borrowing the sum in question would have been compound interest?In most,or perhaps all,cases the answer to that question will be yes.

[Submissions were made on the facts.]

16May.In the light of the written submissions the case resumed for further oral argument.

Ian Glick QC,Rupert Baldry and Gerry Facenna for the revenue.The claimant says there are three routes down which the House can go to give them the remedy they seek.None of those three routes assists them.

The common law route is based on the proposition that the time value of money is as much an enrichment as receipt of the principal amount.The line of authority starting with Rodger v Comptoir d'Escompte de Paris LR3PC465and Merchant Banking Co v Maud LR18Eq659are cases of the court using its inherent power to reverse an earlier order which ex hypothesi should not have been made.It is the court reversing its own mistake.It is clear that the practice gives only simple interest. The explanation of this line of authority in SmithKline Beecham plc v Apotex Europe Ltd[2007]Ch71 shows only that they are cases where the law is compensating the claimant for the defendant's use of the claimant's property.Many of the other cases cited by the claimant fall into the same category:see Watson Laidlaw&Co Ltd v Pott Cassels&Williamson31RPC104;Experience Hendrix LLC v PPX Enterprises Inc[2003]1All ER(Comm)830and Whitwham v Westminster Brymbo Coal and Coke Co[1896]2Ch538.Consequently,they do not assist the claimant:see Clode,The Law and Practice of Petition of Right(1887),p96.Further,Financial Institutions Services Ltd v Negril Negril Holdings Ltd[2004]UKPC40does not advance the claimant's case.The fact that banks are entitled to charge compound interest is well established in English law.

When it comes to the Australian authorities relied on the critical point is that the Australian courts have rejected the central part of the reasoning in London,Chatham and Dover Railway Co v South Eastern Railway Co[1893]AC429;President of India v La Pintada Cia Navigacion SA[1985]AC 104and Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996]AC669: see Hungerfords v Walker(1989)171CLR125;Commonwealth of Australia v SCI Operations Pty Ltd192CLR285and Heydon v NRMA Ltd(No2)53NSWLR600.It is a necessary condition precedent to going down that road that the reasoning in La Pintada[1985]AC104and the Westdeutsche case[1996]AC669(i e that further developments in this area are for Parliament)has to be rejected.

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As to a concurrent liability in equity it should be pointed out that there is no equitable right to recover overpaid tax to the revenue.The claimant's claim is a claim at law.No different relief is available in equity:see Rogers v Ingham(1876)3Ch D351.If interest were available in such circumstances it would have been awarded in Johnson v The King[1904]AC817.The cases which arise in this context are cases where the court is undoing bargains.There was no bargain between the revenue and the claimant.

The central point when it comes to consideration of whether to depart from the decision of the majority in the Westdeutsche case[1996]AC669is that to do so would usurp the role of Parliament. The history of the law in this field shows how wary the courts have been about doing this,given how

Parliament has repeatedly legislated on the basis of what it understands the law to be:see Page v Newman9B&C378;Frühling v Schroeder2Bing NC77;London,Chatham and Dover Railway Co v South Eastern Railway Co[1893]AC429;Johnson v The King[1904]AC817;BP Exploration Co (Libya)Ltd v Hunt(No2)[1979]1WLR783and President of India v La Pintada Cia Navigacion SA [1985]AC104.

If the law is developed to allow a remedy for the time value of money then all claimants would have that right.A right to claim compound interest is clearly a better remedy than under section35A of the 1981Act.It is also better than section35A when the debt has been repaid before the case comes to court.It is therefore obvious that a right to claim interest in the auxiliary jurisdiction will supplant the discretionary right to interest granted by section35A.It would also be inconsistent with the policy of Parliament of only applying simple interest in relation to overpaid or underpaid tax.

It is worth pointing out that neither the judge nor the Court of Appeal thought domestic rules were relevant to what the claimant should recover.

Laurence Rabinowitz QC,Francis Fitzpatrick and Steven Elliott for the claimant.The written submissions are relied upon.The law of interest in England is highly fragmented The cases against the award of interest do not bear scrutiny and are very old.The Australian courts have repudiated Walker v Constable1Bos&Pul306and found a principled solution:see Mason&Carter,Restitution Law in Australia(1995),pp946–967and Edelman&Cassidy,Interest Awards in Australia,Part1 (2003),ch5.It is time for Walker v Constable to be overruled in England.

There is no consistency in English law between awards of interest in different fields and there is no universal abhorrence of compound interest.Section49of the Arbitration Act1996gives arbitrators the right to award compound interest.This is not an area where Parliament has indicated that it objects to the development of the law and English law in relation to interest is in need of correction. The function of the House to clarify the law and the House is now invited to take a significant but principled step.

Glick QC replied.

Their Lordships took time for consideration.

18July2007.LORD HOPE OF CRAIGHEAD

1My Lords,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*577of 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.

2The 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

3The 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.

4The 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 section35A(1)of the Supreme Court Act1981,inserted by the Administration of Justice Act1982, section15(1)and Schedule1,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]Conv313puts 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]AC669the 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.

5The 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]AC429.The decision in that case does not fit happily with Lord Westbury's statement in Carmichael v Caledonian Railway Co(1870)8M(HL)119,131,which identified the principle that*578still 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)9B&C378,381and endorsed by Lord Tenterden's Civil Procedure Act1833(3&4Will4,c42).In1952,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(1854)9Exch341: Trans Trust SPRL v Danubian Trading Co Ltd[1952]2QB297.This modification of the common law rule was approved in President of India v La Pintada Cia Navigacion SA[1985]AC104.

6To 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)171CLR125,142Mason 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]2QB297,306,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?

7The 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)2Burr1005;Frühling v Schroeder(1835)2Bing NC77and Johnson v The King [1904]AC817,applying London,Chatham and Dover Railway Co v South Eastern Railway Co [1893]AC429.But interest has been awarded at common law where restitution follows the reversal on appeal of a previously satisfied judgment:Rodger v Comptoir d'Escompte de Paris(1871)LR3PC 465.Various other exceptions have been recognised:see Heydon v NRMA Ltd No2(2001)53 NSWLR600,603–606,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.

8In NEC Semi-Conductors Ltd v Inland Revenue Comrs[2006]STC606,para173,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 the La Pintada case[1985]AC104,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*579defendant.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 the Westdeutsche case[1996]AC669and the La Pintada case[1985]AC104,neither of which addressed the issues that arise in this case.

The Court of Justice's judgment

9As Park J explained in the introduction to his judgment[2004]STC1178,para3,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 article52of the EC Treaty(now article43)which guarantees freedom of establishment:Metallgesellschaft Ltd v Inland Revenue Comrs and Hoechst AG v Inland Revenue Comrs(Joined Cases C-397and C-410/98)[2001]https://www.doczj.com/doc/023259244.html,munity 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:para88.

10The European Court of Justice explained in para87of its judgment in the Metallgesellschaft/Hoechst case 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 article52of 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 para81of 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.

11In the concluding sentence of para96the 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 para87of 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*580the recovery of a debt or damages or which is paid before judgment.Sempra accepted that the ancillary award would be made under section35A(1)of the1981Act once the principal sum has been identified.

The issues

12The 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 the Metallgesellschaft/Hoechst case[2001]Ch620,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.

13As 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 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.

14The 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 the Metallgesellschaft/Hoechst case,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 para81,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

15These 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*581damages 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(para82)and secondly,that they were to be treated as claims for compensation for damage caused by breach of Community law:para90.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:para88.On the second assumption it said that an award of interest was essential if the damage caused by the breach of article52of the Treaty was to be repaired:para95. 16A 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 Cia Navigation SA[1985]AC104and 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 Ltd v Welsh Health Technical Services Organisation(1980)13BLR1,23,per Ackner LJ;Rees&Kirby Ltd v Swansea City Council(1985) 30BLR1;see also Margrie Holdings Ltd v City of Edinburgh District Council1994SC1,10–11.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.

17I 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 section35A of the Supreme Court Act1981is likely to be the more convenient remedy.

18I 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*582block 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]AC669. Ancillary interest was sought on a sum for which the court was to give judgment in satisfaction of the local authority'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,at p690h.

The restitutionary claim

19Four 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 on12October 1981,and the latest was made on18July1994.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 Comrs[1993]AC70. 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 section32(1)(c)of the Limitation Act1980.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 para11,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 Inland Revenue Comrs[2007]1AC558is that it is open to Sempra to base its claim on this ground,as the longer limitation period is in its best interests:see para51.If this is done, the claim for interest on none of the sample payments will be statute-barred.

20It 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[2001]Ch620,para88,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 para16(ii)of his judgment,after noting in para16(i)that Sempra had formulated its claims in both ways in the alternative.He then added this comment,in para16(iii),after referring to the court's observation in para89of 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.”

*583The 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.

21There 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.

22In Kleinwort Benson Ltd v Lincoln City Council[1999]2AC349,372g–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]2AC548,577–578.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.He said,at p373c,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:p375h.He said,at p377c,that the common law should now recognise that restitution may be granted in respect of money paid under a mistake of law.He said,at p379h,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 Inland Revenue Comrs[2007]1AC558,para62.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.

23Recognition 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),pp48–50has 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 the Kleinwort Benson case[1999]2AC349,408c–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 Smith1998SC725,727per Lord President Rodger; Jacques du Plessis,“Towards a Rational Structure of Liability for Unjustified Enrichment:Thoughts *584from Two Mixed Jurisdictions”(2005)122SALJ142,154,180–181.In the Kleinwort Benson case 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.

24In the Kleinwort Benson case[1999]2AC349,382g–h,Lord Goff gave three examples of the circumstances that he had in mind:the 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 Evans-Jones,Unjustified Enrichment: Vol1,Enrichment by Deliberate Conferral:Condictio(2003),chapter10.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)9SLT 93,95:“The money in question was paid in error under a mistake in 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.

25There 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.

26The claim in the Kleinwort Benson case[1999]2AC349was 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 the Westdeutsche case[1996]AC669,686a–b.His speech in the Kleinwort Benson case 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.

*585

The basis of the award

27I turn then to the basis on which the restitutionary award should be calculated.In Shilliday v Smith 1998SC725,727Lord 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”,p1,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. 28In his introduction to the book which he called Unjust Enrichment,2nd ed(2005),pp3–4,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.

29Professor 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]JR227.As his fourth question he asked what kind of right it is that the claimant acquires:p163.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:pp167–168.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.

30The question then is whether the claimant in unjust enrichment must nevertheless have suffered a loss corresponding to the defendant's enrichment.In Unjust Enrichment,pp167–168,Professor Birks said that there was no need for this to be the measure of the enrichment:*586“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.”

31I would apply the reasoning in these passages to the claim for interest in this case.A remedy in unjust enrichment is not a 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.