House of Lords
Published July 25, 2007
Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue
Commissioners and Another
Before Lord Nicholls of Birkenhead, Lord Hope of Craighead, Lord Scott of
Foscote, Lord Walker of Gestingthorpe and Lord Mance
Speeches July 18, 2007
The court had power to make an award of compound interest in a claim for
restitution where such an award was necessary to achieve full justice for
the claimant.
The House of Lords so held (Lord Scott and Lord Mance dissenting) in
dismissing an appeal by the Inland Revenue Commissioners and the
Attorney-General from the dismissal by the Court of Appeal (Lord Justice
Chadwick, Lord Justice Laws and Lord Justice Jonathan Parker) ( The Times
April 26, 2005; [2005] 3 WLR 521) of their appeal from Mr Justice Park ( The
Times June 25, 2004; [2004] STC 1178) who awarded compound interest to the
claimant, Sempra Metals Ltd, formerly Metallgesellschaft Ltd.
Mr Ian Glick, QC, Mr Rupert Baldry and Mr Gerry Facenna for the Revenue; Mr
Laurence Rabinowitz, QC, Mr Francis Fitzpatrick and Mr Steven Elliott for
Sempra.
LORD NICHOLLS said that in (Joined cases C-397/98 and C-410/98) Metallgesellschaft
Ltd v Inland Revenue Commissioners ( The Times March 20, 2001; [2001] Ch
620) the Court of Justice of the European Communities held that United
Kingdom tax provisions concerning payment of advanced corporation tax as it
affected subsidiary companies whose parent company was outside the UK
contravened article 52, now article 43, of the EC Treaty.
The instant case was a test claim under a group litigation order made to
manage the numerous claims brought against the Inland Revenue as a result of
that decision.
The detriment suffered by a taxpayer by the premature payment of tax was loss
of use of the money for the period of prematurity. So if a taxpayer had to
borrow the money, and his claim was for damages, his loss comprised the cost
of borrowing the money for the period of prematurity.
Alternatively, if the taxpayer’s reparation claim was framed in restitution,
the Inland Revenue’s unjust enrichment comprised the benefit of having use
of the money for the period of prematurity. Either way the essence of the
taxpayer’s claim was for an amount of money by way of interest in respect of
the tax paid prematurely.
Under English law, as a general rule a claimant could recover damages for
losses caused by a breach of contract or a tort which satisfied the usual
remoteness tests. That broad common-law principle was subject to an
anomalous exception, comprising claims for interest losses by way of damages
for breach of a contract to pay a debt. Damages were not recoverable in
cases falling within that exception: see London, Chatham and Dover Railway
Co v South Eastern Railway Co ([1893] AC 429).
The common law should sanction injustice no longer. The House should recognise
the remnant of the restrictive common-law exception for what it was: the
unprincipled remnant of an unprincipled rule.
To that end the House should now hold that, in principle, it was always open
to a claimant to plead and prove his actual interest losses caused by late
payment of a debt. Those losses would be recoverable, subject to the
principles governing all claims for damages for breach of contract, such as
remoteness, failure to mitigate and so forth.
At present, the court was considered to have no jurisdiction to make an award
of compound interest on a personal claim for restitution of a sum of money
paid by mistake or following an unlawful demand.
The position in London, Chatham and Dover Railway was the same regarding an
award of interest on a claim for repayment of money paid by mistake because
a claim for repayment of money paid by mistake was founded on an implied
contract. The fiction of an implied contract lingered long in the law and
was not finally removed until Lipkin Gorman v Karpnale Ltd ([1991] 2 AC
548).
Meanwhile the law on the courts’ inability to award interest at common law on
restitutionary claims remained settled. Hence in Westdeutsche Landesbank
Girozentrale v Islington London Borough Council ([1996] AC 669), counsel
argued the case on the basis that no interest, whether compound or simple,
was recoverable at common law. But, sometimes interest, compound as well as
simple, was recoverable in equity. The appeal proceeded on that footing.
In those unusual circumstances, it was open to the House to reexamine the
basic point of law conceded and not argued on the Westdeutsche appeal,
namely, whether interest might be awarded by the courts in exercise of their
common law jurisdiction to grant personal restitutionary relief.
Having only recently been released from the shackles of implied contract and,
hence, the restraints of the London, Chatham and Dover Railway case, the
law of restitution should now have the opportunity to develop as a coherent
body of principled law. The decision of the House in a case where that point
had been conceded and assumed could not properly stand in the way.
If the House took that opportunity there could only be one answer. Nobody had
suggested a good reason why, in a case like the present, an award of
compound interest should be denied to a claimant. An award of compound
interest was necessary to achieve full restitution and, hence, a just result.
His Lordship would hold that, in the exercise of its common-law restitutionary
jurisdiction, the court had power to make such an award. If that approach
was adopted, the unfortunate decision in the London, Chatham and Dover
Railway case would be effectually buried in relation to the payment of
interest for nonpayment of a debt and in relation to the payment of interest
for having the use of money in personal restitution cases.
In cases of personal restitution the value of the use of money was prima facie
the reasonable cost of borrowing the money in question. The time value of
money, measured objectively in that way, was to be distinguished from the
value of the benefits a defendant actually derived from the use of the money.
In the present case there could be nothing unjust in requiring the Inland
Revenue to pay compound interest, by way of restitution, on the huge
interest-free loan constituted by the payment of advance corporation tax.
But that would not always be so. For instance, a recipient of a payment made
by a mistake might make no actual use of the money. He might pay the money
into a current account at a bank yielding little or no interest.
In such a case, depending on the circumstances, it might well be most unfair
that he should be out of pocket by having to make an additional payment,
whether as compound interest or even simple interest, in respect of the time
value of the money he received.
Here, as elsewhere, the law of restitution was sufficiently flexible to
achieve a just result. To avoid what would otherwise be an unjust outcome
the court could, in an appropriate case, depart from the market-value
approach when assessing the time value of money or, indeed, when assessing
the value of any other benefit gained by a defendant.
The United Kingdom government could of course borrow more cheaply than
commercial companies. The rate for the restitutionary claims therefore
should be the rate at which the government could borrow the relevant amounts
in the market at the relevant times.
Lord Hope delivered a concurring speech. Lord Walker delivered a speech
concurring in the result. Lord Scott and Lord Mance delivered speeches
dissenting in part.
Solicitors: Solicitor, Revenue and Customs; Slaughter & May.
