Sempra Metals Limited (formerly Metallgesellschaft Limited) (Respondents)
Her Majesty's Commissioners of Inland Revenue and another (Appellants)
HOUSE OF LORDS
 UKHL 34
on appeal from:  EWCA Civ 389
OF THE LORDS OF APPEAL
FOR JUDGMENT IN THE CAUSE
Sempra Metals Limited (formerly Metallgesellschaft Limited) (Respondents)
Her Majesty's Commissioners of Inland Revenue and another (Appellants)
Lord Hope of Craighead
Lord Nicholls of Birkenhead
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Ian Glick QC
(Instructed by Solicitor's Office, HM Revenue and Customs)
Laurence Rabinowitz QC
(Instructed by Slaughter & May)
1 and 2 November 2006
16 May 2007
WEDNESDAY 18 JULY 2007
LORD HOPE OF CRAIGHEAD
Interest: an introduction
The ECJ's judgment
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.
The causes of action
The restitutionary claim
The 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.
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.
The basis of the award
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.
Compound interest in the EU
In an action brought on 2 August 2004 by the Commission against the French Republic (Case C-337/04; OJ 2004 C239, p 9) in which it claimed that the French Republic had failed to fulfil its obligations in relation to state aid, the Commission said that it did not agree that the simple interest method used by the French authorities to calculate interest to be paid on the amount to be recovered was the right method:
Compound interest in domestic law
LORD NICHOLLS OF BIRKENHEAD
Advance corporation tax and the EC Treaty
The present case
Compound interest and Community law
Interest losses and damages
Clearly, Brightman LJ's generalised reference to 'the principle of Hadley v Baxendale' was intended to be no more than a reference to that case as the locus classicus on the remoteness test applicable in breach of contract cases.
The Pintada decision
In the High Court of Australia Mason CJ and Wilson J observed that this subverts the second limb of Hadley v Baxendale from its intended purpose: Hungerfords v Walker (1989) 171 CLR 125, 142.
Sempra's claim for damages
The restrictive common law exception today
Interest benefits and restitution
The present position in English law
The court has jurisdiction to award simple interest under section 35A of the Supreme Court Act 1981, because 'debt or damages' in section 35A includes any sum of money recoverable by one party from another: see BP Exploration Co (Libya) Ltd v Hunt (No 2)  2 AC 352. But no interest, whether compound or simple, is recoverable at common law. Sometimes interest, compound as well as simple, is recoverable in equity.
Measuring the value of the use of money
The judge's order
An effective remedy
LORD SCOTT OF FOSCOTE
The Advocate General re-formulated this question in paragraph 41 of his advice
and, in paragraph 45, expressed the principle underlying the remedy to be afforded to Sempra:-
This passage seems to me a very important one. A member state must not profit from the levying of an unlawful charge and the person required to pay the unlawful charge must not suffer from having done so. This is language describing the approach to a remedy for a wrongful act. It is not language apt for describing a remedy for money paid by mistake. The Advocate General then went on to cite a highly relevant passage from the Dilexport Srl v. Amministrazione delle Finanze dello Stato (Case C-343/96)  ECR I-579, para 25:
This citation was repeated by the ECJ at para.85 of its judgment.
The clear thrust of this is that provided under domestic law a remedy is available to subsidiaries such as Sempra that prevents the infringing member state from profiting from its wrongful act and does not prevent the subsidiary from recovering the loss caused to it by the wrongful act, and provided the remedy satisfies the principles of equivalence and effectiveness, Community law will be satisfied.
"Re-imbursement"? The use of this word suggests that the ECJ had in mind a loss suffered by the taxpayer. In paragraph 86 the ECJ referred to "the re-imbursement of charges improperly levied". Here, by contrast, the word "re-imbursement" was clearly referring to the repayment of the improperly levied charge. But in paragraph 87 the ECJ said this:
This passage recognises the compensatory nature of the claim and the use of inverted commas in relation to "re-imbursement" underlines the point that an award of interest to the subsidiaries who had prematurely paid ACT would not be re-imbursement in the ordinary sense of the word. The award of interest to cover the cost of the loss of use of the sums paid by way of ACT would not constitute the restoration to the taxpayer of something that the taxpayer had previously had. It indicates an intention that the taxpayer should be put in the position in which the taxpayer would have been if the ACT had not been paid. This is compensation for "loss of use" of the money, not restitution.
The emphasised words in paragraph 88 show again that the ECJ had in mind compensation to the subsidiary for loss. Paragraph 89 says that that sum "may be claimed by way of restitution". But these paragraphs proceed on the assumption referred to in paragraph 82, namely, that the claims for recovery of interest were to be treated as claims for restitution. The ECJ did not say, and it would have been quite contrary to its own well established jurisprudence for it to have said, that the actions for payment of interest had to be treated as claims for restitution (see paragraph 196 and 197 of Lord Mance's opinion and the cases there cited). It is for domestic law to classify the actions.
This, therefore, was a combination of a claim for restitution of money paid pursuant to a demand (unlawful as the ECJ had held) by the Revenue or paid under a mistake of law, and a claim for compensation for loss of use of the money so paid. But the claim for restitution was supplemented by the following paragraph:
It is apparent, therefore, that the claim, whether expressed as a claim for restitution or as a claim for compensation, was based on Sempra's "loss of use" of the money it had paid to the Revenue as ACT. It was not based on the "unjust enrichment" of the Revenue in having received that money prematurely. I would accept that a claim to recover interest on the money prematurely paid that the Revenue had actually obtained, or, perhaps, to recover the value of a saving actually achieved by the Revenue in not having to borrow equivalent sums, would prima facie be acceptable in a restitutionary remedy. This would be a recovery by Sempra of an actual benefit the Revenue had obtained from the premature payments. It would not represent Sempra's "loss of use of sums so paid". But there was no evidence that the Revenue derived any such actual benefit from the premature payments. The cited paragraph taken as a whole describes a claim for compensation dressed up, for limitation of action reasons, as a claim in restitution. The claim as described could, in my opinion, only succeed if it were based on a wrongful act. It constitutes a tort claim not a restitutionary claim. Sempra's Re-Re-Amended Statement of Claim pleads not only a case of compensation for tort/breach of statute but also that in making the ACT payments Sempra was mistaken as to the validity of the ACT statutory regime and would not otherwise have paid the ACT. Paragraph 11C then pleads as follows:
This may be unexceptional and correct in relation to an action for compensation. It is not, in my opinion, in the least apt in an action for restitution. In an action of restitution it is the position of the recipient of the mistaken payment, and the benefit, if any, that the recipient has obtained from the money, on which attention should be concentrated.
LORD WALKER OF GESTINGTHORPE
It can be said at once that the answer to the second element of the issue is not in dispute. Park J decided that the interest should be simple interest under section 35A of the Supreme Court Act 1981 (as inserted by the Administration of Justice Act 1982), leaving the rate or rates to be determined later if the parties could not agree. There is no appeal from that (though I agree with Lord Nicholls' observation, in para 129 of his opinion, that Sempra might have challenged it). It is the first element of the issue that has given rise to acute controversy. Park J decided ( STC 1178) that the calculation should be effected on the basis of compound interest (with the rate or rates and appropriate rests to be determined later if the parties could not agree) and his decision was upheld (subject to a small drafting amendment) by the Court of Appeal ( STC 687). That is the issue which is now before your Lordships' House.
Should there be another reference under Article 234 EC?
Interest under national law
(1) an action for damages (in the nature of an action for breach of statutory duty: see R v Secretary of State for Transport ex parte Factortame Ltd (No. 7)  1 WLR 942, paras 143-158);
(2) a restitutionary claim for repayment of tax unlawfully exacted;
(3) a restitutionary claim for money paid under a mistake of law.
All these claims are put forward in Sempra's much-amended statement of claim. The ECJ has made clear in Hoechst that the appropriate remedy is to be determined by the national court (and therefore, so far as national law permits a claimant to choose between different causes of action available to him, by the claimant). The Revenue's position is that whichever of the three roads Sempra chooses to follow, it cannot lead to an award of more than simple interest. Nothing in the ECJ judgment, the Revenue argues, requires compound interest. The Revenue argues with particular vigour that compound interest cannot be awarded if Sempra follows the mistake of law route.
There are also some pertinent observations by Lord Goff of Chieveley in Westdeutsche Landesbank Girozentrale v Islington LBC  AC 669, 684 ("Westdeutsche"):
My noble and learned friend has described how this questionable rule survived reviews by this House in London, Chatham and Dover Railway Co v South Eastern Railway Co.  AC 429, La Pintada  1 AC 104 and Westdeutsche  AC 669, but has been progressively eroded by statutory intervention and by judicial recognition that the rule does not exclude the award of interest as special damages. The point was aptly expressed by Ward LJ in Hartle v Laceys  Lloyds Reports PN 315, 327:
The thrust of Lord Nicholls' observations on interest benefits and restitution (paras 101 et seq of his opinion) might be encapsulated similarly as being 'not about interest on restitution but about interest as restitution.'
Interest in Unjust Enrichment
In Moses v Macferlan, Lord Mansfield did not make any reference to interest as such. But the report shows that he was presented with arguments that the count for money had and received (which was, for procedural reasons, a popular form of action) should not be extended too far. In that context he explained (at p 1010) that the count for money had and received had advantages for the litigants on both sides:
Again, a principle applicable to contractual debts was being applied to a restitutionary claim, because it was treated as quasi-contractual in nature (this point is well made in Edelman and Cassidy Interest Awards in Australia, part 1 p 93).
It was therefore natural that the rule as to interest on contractual debts should be applied to restitutionary awards. The term "quasi-contract" should not have survived Lord Wright's great speech in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd  AC 32, 61, though in fact it lingered on for another generation.
He also noted the doubts as to a "free-standing" right to interest expressed in the High Court in Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285, 316-7.
The ECJ judgment in Hoechst
Without referring in terms to La Pintada  AC 104, it made clear that the rule in that case must not be applied.
Instead it compared the cases with Marshall v Southampton and South West Hampshire Area Health Authority (Teaching) (No 2) (Case C-271/91)  QB 126, in which the requisite full compensation had to include an allowance for the time value of money. This case is even stronger because the time value element is not ancillary but absolutely central to the claim.
Hobhouse J was of course delivering his judgment before this House decided not to follow Sinclair v Brougham  AC 398, and so at a time when there appeared to be an indisputable equitable jurisdiction to award compound interest in a case of this sort. The House's decision in Westdeutsche could be distinguished (except in relation to those cases, mentioned in para 33 of Park J's judgment, where amounts of ACT were actually repayable as principal sums) on the basis that in Westdeutsche the House was not concerned (or at any rate did not perceive itself as concerned) with a case where part of the principal sum had been repaid before issue of the writ (in fact the position was more complicated, as the Court of Appeal pointed out in IM Properties plc v Cape & Dalgleish  QB 297 at pp 305 (Waller LJ) and 308 (Hobhouse LJ)). But such a distinction would be anomalous and might be thought to leave the law in an even less satisfactory state.
|Dividend Payment Date||Dividend Amount (£)||ACT Payment Date||ACT Amount (£)||Set off Date||Set off Amount (£)|
|23/7& 21/9/81||2.5m||12/10/81||1,071,428.57||1/7/90 1/7/91||a) 259,206 b) 812,223|
|25/5/94||21.0m||18/7/94||3,230,002.49||1/7/95 1/7/96||a) 1,665,358 b)1,563,644.19|
As the table shows, often very substantial periods of years passed before Sempra was able to set off the ACT payments which the 1988 Act called upon it to make. Sempra started the present proceedings by writ issued 6th March 1996, by when Sempra had not been able to set off the whole of its fourth payment of ACT, although it was able to do so shortly afterwards. But the only claim made in the present proceedings relates to the periods prior to set off. The claim as pleaded is for damages to compensate for the loss of use of the ACT or, by later amendment, for restitution in respect of the loss of use of the ACT during such periods. The course of argument before the House led Sempra to reformulate the latter claim as a claim for the benefit, actual or notional, obtained by the Revenue by having the use of the money.
The Metallgesellschaft case
In paragraph 86, the Court further stated that it was for national law
In paragraphs 87 to 89 it reiterated why, in the circumstances of the present case, an award of interest is not an ancillary matter for the national court, but is required by Community law:
Despite the language of "restitution", the Court appears clearly to have been focusing throughout on Sempra's loss of the money, rather than on any benefit that the Revenue may or may not have had from use of the money. Before the House, as I have said, Sempra's attention shifted to the latter.
So it drew the conclusion that the remedy, if provided by way of an action for damages for breach of Community law, must also include a right to interest. I see no reason why the Court should have insisted that the domestic law remedy or right to interest required by Community law must be provided in both ways - that is both by way of restitution and by way of a claim for damages. It is necessary, but also sufficient, to provide it by one of the alternative routes that the Court was discussing.
The requirement of an effective remedy in national law
The question whether interest should be compound or simple was not raised in Marshall, although the interest which the Industrial Tribunal had purported to award by analogy with the s.35A of the Supreme Court Act 1981 - and which the Employment Appeal Tribunal and Court of Appeal held that it had no power to award - must have been simple interest.
Interest in English law
But he suggested that interest might be recovered in a case of "unjust detention", by which he meant wrongful refusal of payment after demand for payment. In Page v. Newman, Lord Tenterden CJ dismissed this suggestion, at p 381, on the basis that if there were such a rule "it might frequently be made a question . whether the proper means had been used to obtain payment of the debt", which "would be productive of great inconvenience" and the court ought not to depart from the "long-established" contrary rule.
To this, one might add that it is not very many decades ago that double digit inflation was known in this country, and experience in the Privy Council of appeals from the West Indies, where it is still prevalent, includes banking cases where claims have multiplied several times in size with compound interest.
In para. 5.27-5.28 it addressed three reasons put to it for preferring simple to compound interest (viz to protect poor consumers, to discourage claimants from deliberately delaying claims and to avoid the cost of calculating compound interest), by saying (para. 5.28) that
Sempra's damages claim
Sempra's restitutionary claim