Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2016] CSOH 154

 

CA30/16

OPINION OF LORD TYRE

In the cause

ALLIANCE TRUST SAVINGS LIMITED

Pursuer

against

FRASER CURRIE AND OTHERS

Defenders

Pursuer:  D Thomson;  Burness Paull LLP

Defenders:  Simpson, QC;  Anderson Strathern LLP

 

3 November 2016

Introduction

[1]        The late Donald Currie, who died on 31 August 2012, had a self-invested pension plan (SIPP).  The pursuer was the scheme administrator of the Alliance Trust Personal Pension Plan (“the scheme”) of which Mr Currie’s SIPP formed part.  The defenders, who are Mr Currie’s three sons, were the persons nominated by Mr Currie as beneficiaries of the SIPP.  After Mr Currie’s death, the pursuer exercised its discretion in terms of the rules of the scheme to distribute the funds in the SIPP to the defenders in three equal shares.  By two payments instructed on or about 21 November 2012, the pursuer transferred lump sums amounting in total to £927,413 to Messrs Alexr. McAllister & McKechnie (“AMM”), solicitors acting for the defenders.  This represented the total sum held in the SIPP.  No tax was deducted.  Shares of the funds thus transferred were paid over by AMM to each of the three defenders.

[2]        By agreement dated 18 October 2012, the pursuer sold its pensions business, with effect from 13 December 2012, to Curtis Banks plc (“CB”).  On 18 March 2014, CB wrote to AMM advising them that it had come to light that the death benefit payment from Mr Currie’s SIPP attracted a tax charge of 55% which, according to the scheme rules, ought to have been deducted by the pursuer before payment.  CB advised that the sum that ought to have been paid to the beneficiaries was £417,336, and sought repayment of the balance of £510,077 to enable the tax to be remitted to HM Revenue & Customs.  The defenders denied liability to make any repayment.  Further demands were made to the defenders by solicitors acting for CB and then subsequently to both AMM and the defenders themselves by solicitors acting for the pursuer.  

[3]        In these proceedings, the pursuer seeks repetition of sums of £170,025.83 from each of the three defenders.  The defenders challenge the pursuer’s title to sue and the relevancy of its case.  Each of the defenders further maintains that he has not been enriched with regard to any part of the sum received that has been expended to date.  For its part, the pursuer contends that the defenders’ averments concerning title to sue, absence of loss to the pursuer, and absence of enrichment of the defenders are irrelevant.  The case came before me for debate of the parties’ preliminary pleas.  

 

The Tax Charge
[4]        The pursuer has averred circumstances in which it asserts that the lump sum with which this action is concerned was properly categorised for tax purposes as a “drawdown pension fund lump sum death benefit”.  In terms of the Finance Act 2004, section 206(1) (as it stood at the material time), a charge to income tax known as the special lump sum death benefits charge arose inter alia where a drawdown pension fund lump sum death benefit was paid by a registered pension scheme.  Under section 206(2), the person liable to the charge was the scheme administrator.  The rate of the charge, according to subsection (4), was 55%.  Subsection (6) provided that tax under section 204 was to be charged on the amount of the lump sum paid or, if the rules of the pension scheme permitted the scheme administrator to deduct the tax before payment, on the amount of the lump sum before deduction of tax.  Section 254 of the 2004 Act requires (and at the material time required) a scheme administrator of a registered pension scheme to make quarterly returns to HMRC of the income tax for which it is liable.  Under section 254(5), the tax shown in such a return is due at the time by which the return is to be made, and is payable without any need for an assessment.  

[5]        Section 271 of the Finance Act 2004 deals with the situation where a person ceases to be the scheme administrator of a registered pension scheme, to be replaced by a new administrator.  In these circumstances, the outgoing administrator’s liability to pay tax (though not penalties) ceases and the liability is assumed by the incoming administrator. 

 

Correspondence Leading up to Payment by the Pursuer

[6]        On 19 September 2012, AMM wrote to the pursuer to advise it of Mr Currie’s death and of the identity of his executor, and to request a valuation of the SIPP at the date of death.  Ms Barbara Low, Operations Administrator, replied on behalf of the pursuer on 26 September 2012.  She advised AMM that the defenders were the nominated beneficiaries of the funds in the SIPP.  Ms Low described three available options, one of which was that “the fund can be paid as a Lump Sum Payment, less 55% tax charge”.  She sought information to enable the pursuer to decide to whom to make over the funds.  Letters seeking further information were sent by another Operations Administrator to the defenders themselves.  By 15 November 2012 the pursuer had made its decision.  Another Operations Administrator, Ms Rachel Muir, wrote to each of the defenders in the following terms: 

“Further to our previous correspondence, I can now confirm that the Trustees have decided to pay the value of the above plan as follows: 

Beneficiary name	Percentage
Frazer Macfarlane Currie	33.33
Douglas Jackson Currie	33.33
Michael Frazer Currie	33.33

I enclose an acceptance and discharge form, this form is to be completed by you and returned. 

With regard to what can be done with the amount to be paid to you, the beneficiary, the following option is available: 

1.  The appropriate proportion of the fund can be paid as a tax free lump sum payment.

We are not permitted to give you financial or investment advice but, should you have any questions about the mechanics of these options, we will be happy to discuss these with you.”

 

[7]        On 21 November 2012, Ms Muir wrote to AMM confirming that the majority of the funds had been paid into their nominated account and that a closing balance would be paid on 10 December 2012.  She continued: 

“As Donald Currie’s plan funds were uncrystallised and [sic] there was no death lump sum tax charge on the benefit payments that were made.  We confirm that the available funds from the plan are not in excess of the lifetime allowance, however, benefits from all sources must be accounted for by the personal representatives.”

 

A closing balance of £2,249.50 was paid as anticipated on 10 December.  A letter of that date from Ms Muir to AMM again confirmed that there was no death lump sum tax charge on the payments made. 

[8]        Each of the defenders executed, on 19 or 20 December 2012, and returned to the pursuer an indemnity in the following terms: 

“In consideration of the fact Alliance Trust Savings is to rely on the information and documentation provided by me, I release, indemnify and keep indemnified Alliance Trust Savings against any actions proceedings claims or demands by any person claiming to be entitled to have been considered by Alliance Trust Savings under the Full SIPP or received payment from the Full SIPP, but have not because Alliance Trust Savings has not had available to it information that I ought to have brought to their attention but did not.  This indemnity is limited to the value of the payment made to me by Alliance Trust Savings and claims brought under this indemnity before the expiry of seven years from the date of this release and discharge.”

 

Sale of the Pursuer’s Pensions Business to CB

[9]        The agreement entered into on 18 October 2012 between the pursuer and CB bore to relate to “the sale of the Full SIPP Business, the Adviser SIPP Business and the entire issued share capital of Alliance Trust Pensions Ltd”.  A heavily redacted version of this agreement was produced;  I shall have more to say about that later.  In terms of the sale agreement, “the Business” was defined as including inter alia the Full SIPP Business.  Clause 2.2 provided as follows: 

“Unless expressly provided in this Agreement, with effect from Completion, the Seller shall sell and the Buyer, with a view to carrying on the Business, as a going concern, shall purchase free from all Encumbrances with effect from the Effective Time:

2.2.1    the Goodwill; 

2.2.2    the benefit (subject to the burden) of the Customer Contracts; 

2.2.3    all rights and obligations to administer the Business in succession to the Seller in its capacity as the provider of the Services; 

2.2.4    the Business information; 

2.2.5    the Records;  and

2.2.6    in respect of the Assets, all of the Seller’s rights against third parties, including rights under any warranties, conditions, guarantees or indemnities or under the Sale of Goods Act 1979 and the benefit of all sums to which the Seller is entitled from third parties or insurers in respect of loss or damage to the Assets.” 

 

The word “Assets” in Sub-Clause 2.2.6 is a defined term, meaning “the property, rights and assets of the Business set out in clause 2.2”.  It is common ground that in order to avoid circularity the reference in this definition to Clause 2.2 may reasonably be interpreted as a reference to the first five sub-paragraphs of Clause 2.2. 

[10]      Clause 2.3 provided that “the Excluded Assets and the Excluded Liabilities shall be excluded from the sale under the Agreement”.  “Excluded Assets” were defined in Clause 1.1 as meaning: 

“…save for the Assets, all assets and rights possessed by the Seller and used in the Business or otherwise (which for the avoidance of doubt includes the Book Debts and the Seller’s cash-in-hand or at any bank or at any other financial institution where the Seller holds a bank account).” 

 

“Goodwill” was defined as: 

“the goodwill, custom and connection of the Seller in relation to the Business, together with the exclusive right for the Buyer and its successors and assigns to carry on the Business (other than under [the name Alliance Trust or similar] in respect of the Full SIPP Business) and respectively to represent themselves as carrying on the Business in succession to the Seller including the benefit of all pending contracts, orders and engagements and the right to all Member lists and details of suppliers to the Business”.

 

Demands for Repayment

[11]      The first intimation to the defenders of a problem came in a letter dated 18 March 2014 from CB to AMM, stating inter alia: 

“…Following our acquisition of the Full SIPP business, we have carried out an audit to ensure all the data we hold is accurate and correct from both an administrative and regulatory perspective.  During this audit we discovered a discrepancy in the payment which was made to you in relation to Mr Currie’s estate.  In a letter to yourselves of 26 September 2012 from Alliance Trust Pensions, they correctly stated that the fund could be paid out as a lump sum, less a 55% tax charge.  On reviewing Mr Currie’s case, we found that Alliance Trust then failed to deduct this tax and a payment of £927,413.63 was made and this amount was paid gross in error.

 

…

 

To correct the position and rectify this error, we must therefore ask for the repayment of the sum of £510,077.49, so that tax can be paid.  Payment should be made to the account below…”

 

Details were supplied of a bank account in the name of CB.  AMM replied to this letter on 31 March 2014 denying that the payment had given rise to a tax charge, noting that the pursuer had come to that conclusion, and stating that this had now been confirmed by advice from counsel.  AMM also observed that they had paid out the whole of the funds to the defenders and could not be liable to repay any amount to CB. 

[12]      On 4 April 2014, CB replied to AMM, noting again that the pursuer’s letter of 26 September 2012 had stated that the lump sum payment was subject to a 55% tax charge.  The explanation given for the charge was that it was a lump sum payable on death from crystallised funds.  Although it was accepted that there had been a failure on the pursuer’s part, CB had a responsibility to ensure that appropriate tax was paid.  The request for payment to CB was renewed.  AMM replied on 23 April 2014, enclosing a copy of Ms Muir’s letter dated 21 November 2012 which stated that the fund was uncrystallised and that no tax was payable.  AMM expressed the view that payment of the lump sum in return for the acceptance and discharge forms completed by the defenders constituted an offer and acceptance which superseded earlier correspondence. 

[13]      Communications ensued between solicitors acting for CB and for the pursuer respectively, in which CB intimated claims against the pursuer under various clauses of the sale agreement in respect of the tax due on the payment made to AMM on behalf of the defenders.  The pursuer was invited to confirm whether it wished, as it was entitled to do in terms of the sale agreement, to take over conduct of the demand for repayment.  So far as the defenders were concerned, the next communication consisted of letters dated 23 July 2014 from Gregg Latchams, Solicitors, Bristol, acting on behalf of CB, requesting repayment of £170,025.95 from each of them.  It appears that none of the defenders responded.  Further letters were sent to them by Gregg Latchams on 2 April 2015, requesting payment and stating: 

“In the event we do not hear from you within 14 days with your proposals for repayment of the amount due, our client will be passing the matter back to Alliance Trust Savings Limited, the company that made the payment, who have made very clear to us that they will pursue recovery of the full amount from you through court action.”

 

[14]      At some time in or after July 2015, a Deed of Amendment and Assumption of Claim (“DAA”) was entered into among Tower Pension Trustees Limited (formerly Alliance Trust Pensions Limited, and referred to as “the Trustee”), CB and the pursuer;  the exact date is not known because only an unsigned draft has been lodged in process.  In terms of this deed, the pursuer assumed conduct of the claim for repayment against the defenders “on behalf of both [CB] and/or the Trustee”.  Each of CB and the Trustee “…delegate[d] conduct of the claim to [the pursuer] at [the pursuer’s] expense”.  There is an express non-admission of liability on the part of the pursuer in relation to the claim, and/or any liability to CB under the sale agreement.  CB and the Trustee undertook to make available to the pursuer and its professional advisers all information reasonably required to enable it to pursue, appeal or compromise the claim.  Clause 2.9 stated that “Nothing in this Deed is intended to create a right of double recovery to the Trustee and [CB] in addition to any amounts received from [the pursuer] in relation to the Claim pursuant to the Sale Agreement.”

[15]      On 17 August 2015, CB wrote to HMRC intimating that a drawdown pension fund lump sum death benefit in respect of Mr Currie’s SIPP had been paid out by the pursuer as scheme administrator without making the necessary 55% tax deduction.  CB noted that no accounting for tax return had been submitted in respect of the payment, nor any tax paid.  It asked HMRC to grant a period of time during which the pursuer would pursue recovery of the tax charge from the defenders to enable it to make a payment direct in satisfaction of any assessment.  On 15 February 2016, CB wrote again to HMRC, noting that it had received no response to its letter of 17 August 2015 and asking for confirmation of receipt.  No further correspondence to or from HMRC was produced.  

[16]      On 22 February 2016, solicitors acting on behalf of the pursuer wrote to AMM and to each of the defenders demanding payment, failing which court proceedings would be commenced.  The present action, founded upon the condictio indebiti, was subsequently raised. 

 

Title to Sue

Argument for the Defenders

[17]      On behalf of the defenders it was submitted that the pursuer had failed relevantly to aver circumstances in which it, and not CB, had title to sue for any sum paid in error to the defenders.  Demands for repayment had come initially from CB and its solicitors.  The parties to the DAA had hedged their bets as to who was the correct pursuer.  The question whether any claim against the defenders remained vested in the pursuer or had been assigned to CB depended upon the terms of the sale agreement.  However, because of the extent of redaction of the copy produced, it was not possible to ascertain whether the benefit of any claim had been assigned or not.  Clause 2.2.6 transferred inter alia “all of [the pursuer’s] rights against third parties” to CB.  That was capable of including the pursuer’s claims against the defenders if the rights could be said to be “in respect of the Assets” and accordingly not Excluded Assets. 

[18]      There were various ways in which the claims against the defenders might be properly characterised as being “in respect of the Assets”.  They could be part of the Goodwill (Sub-Clause 2.2.1), which was defined as including the exclusive right for CB to carry on the Business.  The Business, as defined, included provision of the Full SIPP Services, which was in turn defined as including the provision of scheme administrator responsibilities in connection with the Full SIPP Business.  That would include withholding tax from death benefits where appropriate.  If Mr Currie had been included in the list of Full SIPP Customer Contracts included in a CD-Rom delivered to CB on the date of the sale agreement (which was not known), then it followed that the claims for repayment had been assigned.  Alternatively, the claims might be part of “the benefit of the Customer Contracts” (Sub-Clause 2.2.2) or of “all rights and obligations to administer the Business in succession to the Seller” (Sub-Clause 2.2.3) with the same consequence.  There was a limit on the total amount recoverable by CB from the pursuer under warranty claims;  it could not be determined whether CB would recover any or all of the value of this one.  It made commercial sense for title to sue to be vested in CB, which had the statutory liability to pay any tax due. 

 

Argument for the Pursuer

[19]      On behalf of the pursuer, it was submitted that the starting point was that title to sue for repayment of a sum paid in error rested with the person who had made the payment.  Title to sue in the present case was not founded on the DAA.  It was for the defenders to satisfy the court that the pursuer had lost its title to sue by virtue of the terms of Sub‑Clause 2.2.6.  The only rights against third parties acquired by CB in terms of Sub‑Clause 2.2.6 were rights “in respect of the Assets”, ie in respect of the matters listed in the other sub-clauses.  On the basis of the clear language used in those sub-clauses, the pursuer did not assign to CB its title to sue.  What was sold by the pursuer to CB was a bundle of rights necessary to carry on the business after the Completion Date (13 December 2012).  Matters outstanding at the Completion Date remained the assets and liabilities of the pursuer.  None of the sub-clauses founded upon by the defenders was capable of including a claim under the condictio indebiti which subsisted prior to the Completion Date. 

[20]      If the language of Clause 2.2 was capable of bearing more than one construction, the pursuer’s interpretation made better commercial sense.  CB was entitled to make an indemnity claim against the pursuer, while the pursuer was entitled to make a claim for repetition against the defenders.  On the defenders’ construction, CB would be entitled to make a double recovery. 

 

Decision
[21]      I agree with the submission on behalf of the pursuer that title to sue rests prima facie with the person who claims to have made the payment sought to be recovered, and that the question for determination is whether title was assigned by the pursuer to CB in terms of the sale agreement.  In my opinion it was not.  The provisions of the sale agreement made available to the court (including those provisions disclosed for the first time during the debate) are in my view sufficient to enable me to hold that there was no assignation of the present claim by the pursuer to CB.  The assets and rights transferred by the pursuer to CB are closely circumscribed by the terms of Clause 2.2:  they consist, in substance, of what is necessary – but no more – to enable CB to carry on the Business (as defined), as a going concern, with effect from the Completion Date.  The only rights against third parties that were transferred were rights relating to the carrying on of the business after that date.  I reject the defenders’ submission that any right of repetition of a sum erroneously paid to them is properly characterised as referable to the future carrying on of the business or, as Clause 2.2 puts it, as being “in respect of the Assets”. 

[22]      I reject in particular the argument that it is necessary to know whether the name of Mr Currie’s SIPP was included in the list on the CD-Rom delivered on the date of the sale agreement.  I am satisfied that none of the sub-clauses of Clause 2.2 founded upon by the defenders is, on a proper construction, capable of including a right to seek repayment under the condictio indebiti.  Such a right cannot reasonably be described as being a right in respect of “the exclusive right… to carry on the Business”, and is not therefore a right in respect of the Goodwill.  Nor can it reasonably be described as a right in respect of the benefit (subject to the burden) after the Completion Date of the Customer Contracts, or as a right in respect of the right to administer the Business after the Completion Date.  It has no connection with the carrying on of the business as a going concern after the Completion Date, with the benefit (in the form of profits) to be obtained from the administration of SIPP contracts after the Completion Date, or with the administration of SIPP contracts after the Completion Date.  Mr Currie’s SIPP had come to an end and the funds had been disbursed.  Although in the scheme of the agreement “Excluded Assets” are defined under exception of the Assets, rather than the other way round, I am to some extent reinforced in my view by the fact that any right to repayment falls clearly within the definition of Excluded Assets, being a right possessed by the pursuer (whether used in the Business or otherwise).  In the present context it is analogous to the pursuer’s right as the holder of a bank account. 

[23]      It follows from the view that I have expressed that no right of recovery of any sum paid in error was acquired by CB under the sale agreement.  There is therefore no risk of the defenders being found liable to CB as well as to the pursuer. 

 

Relevancy of the Pursuer’s Case

Arguments for the Defenders

[24]      Whether payment “undue”.  Firstly, it was submitted that the pursuer had failed to aver circumstances in which the payments in respect of which repetition was sought were “undue”, as required by the law of unjustified enrichment.  The payments were made on the terms set out in the pursuer’s letters of 15 November 2012, ie in exchange for receipt of the acceptance and discharge forms sent to the defenders for signature and return.  There was here an offer and acceptance creating a contractual relationship between the pursuer and the defenders which superseded any previous arrangement giving rise to any issue of unjustified enrichment.  A unilateral uninduced error of the pursuer as to whether the payment fell to be made free of tax did not constitute a ground for setting aside the contract. 

[25]      In any event, the pursuer had failed to aver any basis upon which it was required to deduct and withhold tax from the payment made.  There was no statutory obligation to do so, and the scheme rules went no further than conferring a power on the administrator to make a deduction.  No exercise of the power was averred and it was readily apparent that the power had not in fact been exercised.  The defenders were entitled to fair notice of the basis upon which it was said that a sum totalling £510,077 had been wrongly paid to them. 

[26]      Whether sum paid in error.  Before the pursuer’s claim could succeed, and on the assumption that the sum now sought to be recovered was not due, it would be necessary for the pursuer to prove that it had not made the payment while knowing that it was not due.  The pursuer had failed to aver circumstances in which this was so.  At least one of the pursuer’s administrators had been aware that the payment was taxable;  that knowledge could be attributed to the pursuer as a corporate body.  If indeed the payment was made when not due, this was casual negligence on the part of one of the pursuer’s administrators which ought to bar the claim for repetition.  Reference was made to Bell v Thomson (1867) 6M 64. 

[27]      Whether the pursuer had been impoverished.  Another of the requirements of the condictio indebiti was that the recipient of a payment has been enriched at the expense of the payer.  In other words there had to be “some expense or some disadvantage, and by reason of that expense or disadvantage there has been a benefit created to [the defender]”:  cf Stewart v Steuart (1878) 6R 145, Lord President Inglis at 149.  In the present case the pursuer had sustained no disadvantage:  if it had retained the funds it would have had to pay them over to someone else, namely HMRC.  It did not now even have to do that, because the pursuer’s liability for tax had ceased when it ceased to be the scheme administrator.  Any liability to CB under the sale agreement was a matter inter alios so far as the defenders were concerned with no causal connection to what was said to have been their enrichment.  Moreover it was not averred that tax had actually been paid. 

[28]      Nature of the error.  Although it was accepted, under reference to Morgan Guaranty Trust Company of New York v Lothian Regional Council 1995 SC 151, that proof of excusability of the error was unnecessary to sustain a condictio indebiti, it was nevertheless a relevant factor in determining liability to make repetition.  In the present case the pursuer offered no explanation for the error (assuming it to have been so) and the defenders were left in ignorance as to what weight, if any, might fall to be attached to the nature of the error when the court comes to assess whether it is equitable to order repayment.  Given the rights conferred by the DAA upon the pursuer to obtain information (from its own former employees), there was no excuse for failing to make the requisite averment. 

 

Decision
[29]      In my opinion, there is no merit in any of these arguments.  As regards the payment being undue, the pursuer has averred that the description of the payment as a tax‑free lump sum was erroneous and has specified the basis upon which it asserts that the sum paid was chargeable to tax at 55%.  Liability for the tax is imposed by statute upon the scheme administrator.  The scheme rules confer power on the scheme administrator to deduct tax before remitting the balance to a beneficiary.  In my view this constitutes an ample foundation for the pursuer’s averments that it ought to have deducted tax before making any payment, and that the gross payment was made on the mistaken view that it could be made without deduction of tax.  On that basis the pursuer is entitled to contend that the payment was undue. 

[30]      I reject in particular the proposition that the granting of an indemnity by each of the defenders in exchange for receipt of funds constituted a contract in terms of which the pursuer bound itself to make a gross payment.  The contractual relationship was between the late Mr Currie on the one hand and the pursuer (and its predecessor) on the other;  the obligation of the latter in terms of the contract was to administer the scheme of which Mr Currie’s SIPP formed part according to its trust deed and rules.  The assets of the scheme were held on trust for its members and their beneficiaries.  Although the trustee of the scheme was not the pursuer but rather Alliance Trust Pensions Limited, the rules extant at the material time provided for discretionary decisions to be taken by the scheme administrator, ie by the pursuer.  Those decisions were taken and implemented in a fiduciary capacity, and relied to some extent upon information provided by a beneficiary.  It is both normal and reasonable for a beneficiary in receipt of funds to be required to provide an indemnity against any loss caused by his failure to disclose relevant facts.  The payment was made in pursuance of the scheme administrator’s obligations in terms of the scheme, and not as consideration for receipt of the indemnity.  On its terms, the indemnity bears to have been granted not in exchange for payment but in consideration of the fact that the pursuer relied on information provided by the defenders.  No contractual relationship with the defenders was thereby created.  

[31]      The pursuer has also, in my view, pled a relevant case with regard to absence of knowledge that the payment was not due.  As the pursuer submitted, knowledge of the correct position, if later forgotten, does not bar a claim in unjustified enrichment:  see Evans‑Jones, Unjustified Enrichment (2003), vol 1, paragraph 3.24 and authorities there cited.  At most it might be a factor for the court to consider in determining whether it was equitable to order repayment:  see eg Bell v Thomson (above), Lord Justice-Clerk Patton at 67.  Here the pursuer offers to prove that the obligation to deduct tax was overlooked by the individual employee responsible for making the payment;  that would be sufficient, if proved, to establish absence of knowledge that the whole of the amount was not due. 

[32]      As regards absence of averments of loss on the part of the pursuer as a consequence of the payment, it was submitted on behalf of the pursuer, under reference to Evans-Jones (op cit) at paragraph 7.46, that it was not a necessary element of a claim for repetition that it should have suffered a loss.  Whilst there appears to be force in this submission, it is unnecessary for me to express an opinion upon it in the circumstances of this case, as I am of the view that the pursuer has relevantly averred a loss consisting of the ultimate burden of payment of tax which is due to HMRC in terms of the charging provisions, payable by CB by virtue of its status as current scheme administrator, and recoverable from the pursuer under the terms of the sale agreement.  I see no material distinction between the pursuer’s original liability to HMRC at the time when the payment was made and the pursuer’s substituted liability to indemnify CB for tax which, ex hypothesi, was due but which was not remitted to HMRC as a consequence of an error at the time of payment. 

[33]      I would, however, find it of assistance if the taxability of the payment could be agreed or clarified prior to further substantive procedure in this action.  It is not altogether satisfactory that the court should be asked to make a finding in these proceedings regarding the tax liability of a person (CB) which is not a party to them.  The provisions of the tax legislation are straightforward, but it does not appear to be a matter of admission by the defenders that tax was chargeable on the payment, although it is unclear on what basis the defenders might wish to contend that the payment was correctly made free of tax.  This requires to be clarified, and at the same time it would be helpful if it could be confirmed by the pursuer whether HMRC view the payment as chargeable to tax and, if so, whether there is likely to be any challenge to that view. 

[34]      Finally, it is clear from the opinions delivered by the members of the court in the Morgan Guaranty case that it is not part of the law of Scotland that in order to found a claim for repetition the error must be shown to have been excusable.  As Lord President Hope observed (page 166), excusability may play a part in a decision as to where the equities lie if the point is raised in answer to the pursuer’s claim.  Where, as here, the pursuer makes no averment that the error was excusable, the court may draw its own inference on that particular matter when carrying out the balancing exercise.  That does not affect the relevancy of the pursuer’s claim. 

 

Relevancy of the Defenders’ Case

Argument for the Pursuer

[35]      In addition to challenging the relevancy of the defenders’ averments regarding the pursuer’s title to sue, which I have addressed, the pursuer submitted that the defenders’ case was irrelevant as regards (i) the need to aver loss on the pursuer’s part and (ii) the uses to which the defenders claim to have put the sums received by them.  As to the first of these, it was acknowledged by the pursuer that even if impoverishment of the pursuer was not a pre-requisite of an action of repetition, absence of loss might be relevant to the balancing of equities between the parties (Evans-Jones, op cit at para 7.47, under reference to Haggarty v Scottish Transport and General Workers Union 1955 SC 109).  For that reason I am not inclined to exclude from proof the defenders’ contention regarding absence of loss, in case the pursuer were to fail to establish at proof some or all of the loss asserted. 

[36]      As regards the defenders’ use of monies received, it was submitted on behalf of the pursuer that the defenders’ averments that they should not be ordered to repay any part of the sums received because, or to the extent that, the monies had been spent, were irrelevant and should be excluded from proof.  Reference was made to the opinion of the Lord Ordinary (Kyllachy) in Credit Lyonnais v George Stevenson & Co Ltd (1901) 9 SLT 93, and to dicta of Lord Goff of Chieveley in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548.  The mere spending of money did not, it was submitted, amount to a relevant change of position.  Only “extraordinary” expenditure, arising as a result of mistaken belief of entitlement to the money, was capable of doing so.  Most of the defenders’ averments in the present case narrated ordinary day-to-day expenditure which could not amount to change of position.  Even larger items, such as acquisition of property or repayment of a mortgage, did not amount to a change of position:  if anything, they had increased the defenders’ estates and not diminished their value. 

[37]      In any event, it was submitted, the averments were irrelevant because they failed to specify whether the expenditure had been incurred before or after it came to the defenders’ notice that an error resulting in overpayment had been made.  Each defender merely averred that he had “spent some of the payment before then”.  On any view, expenditure incurred after intimation of a claim by CB could not be said to have been incurred in good faith on the belief that the monies belonged to the defenders.  Without details of the dates when expenditure was incurred, the defence lacked adequate specification.  

 

Decision

[38]      Scots law has long recognised a change of position defence to a claim for repetition of money paid in error.  The clearest statement of the defence is that of Lord Kyllachy in Credit Lyonnais v George Stevenson & Co Ltd (above) at 95: 

“The money in question was paid in error under a mistake in fact. It was therefore reclaimable, unless (the pursuers' remedy being equitable) there was an equitable defence to repetition. In my opinion the defenders, in order to establish such a defence, would require to show (1) that they had reasonable grounds for believing that the money was theirs;  and (2) that having that reasonable belief, they acted upon it so as to alter their position in such manner as to make repetition unjust.”

 

On the basis of Lord Kyllachy’s analysis, there are three requirements to be met by a defender seeking to resist a claim for repetition on the ground of change of position:  firstly, the defender must have had reasonable grounds for believing that the money was his;  secondly, there must be a causal connection between the receipt of the money and the change of position relied upon (so that, for example, the defence will not be sustained with regard to expenditure that the defender would in any event have incurred);  and, thirdly, it must be inequitable for the court to order repayment. 

[39]      As regards the third of these requirements, the Scottish courts appear to have been influenced largely by the relative fault of the parties to the action.  In the Credit Lyonnais case, Lord Kyllachy granted decree for repetition because he considered that “the defenders, and not the pursuers, were mainly, if not primarily, to blame for what occurred”, and that the defenders were “at least culpably negligent” albeit not dishonest or in bad faith.  In Royal Bank of Scotland v Watt 1991 SC 48, a defence of change of position failed because (Lord Justice-Clerk Ross at 57) the defender “…did not act in a reasonable manner and he has therefore failed to prove that it would be inequitable for him to repay the money to the pursuers”.  Evans‑Jones, however, expresses the view (op cit, para 9.73) that all relevant factors, including fault, may be taken into consideration in assessing the balance of the equities between the parties.  The critical consideration, according to Evans-Jones, is whether the defender was in good faith as to his entitlement to the benefit.  This was the approach adopted by the Privy Council in Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER (Comm), and it has been advocated for Scots law in an article by Mr GC Borland, Fault in the Change of Position Defence 2006 JR 89.  It is settled by the Morgan Guaranty case (above, Lord President Hope at 165) that the onus rests upon the defender to satisfy the court that it would be unjust for him to be ordered to make repayment. 

[40]      In Lipkin Gorman v Karpnale Ltd (above), in which the change of position defence was formally recognised by English law, Lord Goff of Chieveley (at 580) stated the principle broadly:  the defence was available to a person whose position had so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full.  Lord Goff emphasised that the mere fact that the defender had spent the money, in whole or in part, did not of itself render it inequitable that he should be called upon to repay.  On the somewhat complex facts of that case, the House of Lords adopted a solution which it regarded as not entirely logical but “surely just” and ordered repayment of part of the sum sued for.  So far as I am aware Lord Goff’s observations have not to date been expressly adopted by a court in Scotland. 

[41]      In the present case the defenders all aver that they received their payments in good faith, believing the whole sum received to be due to them.  They assert that they reasonably relied on the last communication from the pursuer’s Operations Administrator that the lump sum could be paid free of tax.  The first defender avers that he used most of the money received by investing in an ISA, making a pension contribution, purchasing and refurbishing a flat, and for general spending.  The second defender avers that he used part of the money to repay part of his mortgage, paying a credit card debt, on home improvements and the purchase of a car, and on general spending.  The third defender avers that he used the money received for family living expenses during a time when he had no other significant income.  The pursuer for its part avers that the defenders’ reliance upon the erroneous statement that the payment was tax-free was not reasonable, especially as they had previously been told by another Operations Administrator that tax at 55% fell to be deducted.  Enquiries were continuing into the cause of the error when the payment was made. 

[42]      In my opinion, each of the defenders has averred a defence based on change of position that is relevant for inquiry.  There are undoubtedly issues to be addressed in relation to all of Lord Kyllachy’s three requirements, but none of these can properly be determined before proof.  A particular issue will arise in relation to expenditure incurred by the defenders after the date when they became aware of CB’s claim for repayment.  I do not at this stage exclude the possibility that the defenders remained in good faith for a period of time thereafter, in view of the fact that the claim was resisted – apparently with the support of counsel’s advice – by AMM on the defenders’ behalf.  That too will be a matter to be assessed after the facts have been investigated.  I do, however, consider that it would be appropriate for each of the defenders to supply a more detailed chronology of their respective expenditures and investments, under reference to the dates of the demands for repayment noted above.  This need not be done as a matter of formal pleading but may be provided in separate notes to be lodged in process. 

 

Disposal

[43]      I shall repel each of the defenders’ first pleas-in-law, being pleas of no title to sue, and I shall sustain the pursuer’s first plea-in-law, a general plea to relevancy, to the extent of excluding from probation each of the defenders’ averments in answer 1 regarding title to sue.  Quoad ultra I shall leave all pleas standing and put the case out by order for discussion of further procedure.  Expenses are reserved. 

 

Postscript – Redaction

[44]      It is not uncommon in commercial actions for documents to be lodged that contain sensitive commercial information.  Such documents may be founded upon or incorporated into the pleadings of a party and must therefore be lodged with the pleadings in accordance with the rules of court.  Others may be produced voluntarily by a party in order to avoid the need for commission and diligence;  this is clearly to be encouraged.  No privilege attaches in either case to documents merely because they contain information that is commercially confidential.  The court will not, however, require disclosure of sensitive commercial information that is not material to the issue to be determined.  It may therefore be acceptable for a document to be lodged under redaction of sensitive or confidential information.  Any such redaction should be limited to details meeting the above description, ie to confidential matters not material to the issue before the court. 

[45]      In the present case, difficulties were caused by virtue of a decision by the pursuer to lodge a heavily redacted version of the sale agreement with CB.  I accept that this document included confidential details with no relevance to the case, such as the purchase price paid by CB for the pursuer’s pensions business, the details of the selling solicitors’ bank account, and the list of names of customers whose pensions were transferred, and that there could be no reasonable objection to redaction of such information.  However, very large sections were blacked out and I am far from satisfied that all of the redacted material was of a confidential or commercially sensitive character.  To make matters worse, it transpired when an unredacted version of Clause 1 of the agreement (containing definitions) was produced in the course of the hearing that details which were relevant to the case including, for example, the definition of goodwill, had been redacted in the previously-lodged version.  Other definitions with no sensitive character whatever (such as the meaning of “VAT”) had also been blacked out. 

[46]      Practitioners should bear in mind that redaction of documents for reasons other than the exclusion of legally privileged material is under the control of the court.  Redaction should be undertaken with care and practitioners are responsible for ensuring that it goes no further than is necessary to protect a party from disclosure of irrelevant confidential matters.  If progress of a case were to be delayed by unnecessary redaction, there could be consequences for the redacting party as regards any expenses occasioned by the delay.