THE law of unjust enrichment continues to be shaped by the long wave of cases in which restitution is sought from the Revenue for unlawfully levied taxes. While earlier cases in the wave liberalised the scope of unjust enrichment, the tide has now turned, and more recent cases in the same wave have begun narrowing it. That trend is continued by Prudential Assurance Co. Ltd. v Revenue and Customs Commissioners [2018] UKSC 39, [2018] 3 W.L.R. 652.
The taxpayer's claim was in respect of taxes paid on dividends from its shares in non-UK companies. In breach of EU law, dividends from shares in non-UK companies had historically been the subject of less favourable treatment than dividends from shares in UK companies. It was common ground before the Supreme Court that restitution should be available in respect of taxes paid on the non-UK dividends to reflect the difference. However, there was a number of disputed issues relevant to the amount of restitution payable by the Revenue. Most were tax-specific and can be ignored for present purposes. But one issue was a matter of wider implication – the availability of compound interest in the law of unjust enrichment – and that is the subject of this note.
Towards the beginning of the tax wave of restitution cases, in Sempra Metals Ltd. v Inland Revenue Commissioners [2007] UKHL 34, [2008] 1 A.C. 561, Lord Hope and Lord Nicholls recognised the availability of compound interest on the principal sum of money by which a defendant has been enriched. Their Lordships characterised compound interest not as an ancillary amount but as a principal remedy reversing the enrichment of the time or use value of principal sum that had been paid. However, in Prudential Assurance, the Supreme Court overturned the judgments of Lord Hope and Lord Nicholls in Sempra Metals. In a unanimous judgment, five reasons were given for no longer allowing a claim for compound interest for the use value of money:
(1) The Court of Justice of the European Union has clarified since Sempra Metals that compound interest was not required as a remedy for taxes levied in breach of EU law: Littlewoods Ltd. v Revenue and Customers Commissioners [2017] UKSC 70, [2017] 3 W.L.R. 1401, noted R. Williams [2018] C.L.J. 468;
(2) The House of Lords in Sempra Metals had not considered that the availability of compound interest at common law would conflict with statutory provisions stipulating that only simple interest should accrue on overpaid tax: section 78 of the Value Added Taxes Act 1994 and section 826 of the Income and Corporation Taxes Act 1988;
(3) Parliament had introduced retrospective limitation periods to limit the Revenue's exposure to vast claims for compound interest, and Sempra Metals was decided on that basis, but since then these retrospective limitation periods had been struck down as being incompatible with EU law;
(4) Consequently, compound interest claims were causing enormous disruption to public finances; and
(5) The development of the law of unjust enrichment since Sempra Metals has called into question the recognition of a compound interest claim representing the time value of money.
Reason (5) is the most important for the general direction of travel for the law of unjust enrichment. In his seminal judgment in Investment Trust Companies v Revenue and Customs Commissioners [2017] UKSC 29, [2018] A.C. 275, Lord Reed narrowed the scope of unjust enrichment by holding that it was concerned with reversing normatively defective transfers of value arising from direct dealings between a claimant and a defendant. Adopting this analysis in Prudential Assurance, the Supreme Court reasoned that the use value of money was not directly transferred from claimant to defendant, but instead was a mere consequence of the original transfer of the money itself (see [71]–[74]). In other words, while the use value of money may have been enriching to the defendant in a way that might be calculated by reference to compound interest (but cf. [80]), any such enrichment cannot be regarded as being “at the expense” of the claimant. The result is a further narrowing of the scope of the law of unjust enrichment.
Two technical issues arising from Prudential Assurance should be noted. First, the rejection of restitution claims for the time or use value of money does not mean that no interest is available at all. Rather, so long as the principal sum has not been repaid before the commencement of proceedings, simple interest is available under section 35A of the Senior Courts Act 1981. However, as with other claims, a defendant can avoid paying interest at all under the 1981 Act if the principal sum is repaid before proceedings commence. Secondly, in Prudential Assurance, the Revenue did not contest paying compound interest on unlawfully levied advance corporation tax which was subsequently set off against lawfully levied mainstream corporation tax between the date of payment and the date of set off. Section 35A cannot apply to such a claim, but an interest claim (however calculated) is nonetheless required as a matter of EU law. The Supreme Court did not have to decide whether the Revenue's concession to calculate this remedy on a compound rather than a simple interest basis in those circumstances was correct, but it made oblique reference (at [78]]) to “a number of potential solutions” that could be adopted in this corner of the law. Only time will tell what that means.
There are three more general points that bear emphasis. First, Prudential Assurance requires us to take the “direct dealings” rule seriously. It follows that other doctrines said to be part of the law of unjust enrichment may have to be re-characterised as different types of claim. In particular, the so-called “secondary liability” and “ignorance” grounds for restitution will need to be reconsidered because it is artificial to regard those claims as reversing direct transfers of value. In secondary liability cases, the direct transfer of value is to the person owed the liability not the person primarily owing that liability. And ignorance cases are concerned with property rights not value, and also need not involve direct dealing between the parties. See further W. Day [2017] L.M.C.L.Q. 588, at 594, 600–01. Courts and commentators should not shrink from further narrowing the scope of the law of unjust enrichment since it would result in a more coherent, stable and defensible set of principles. But if that is unpalatable, an alternative solution would be to recognise that not all unjust enrichment claims adopt the same principles for the questions of “enrichment”, “at the expense” and “defences”: see ibid., at pp. 602–05.
Secondly, it should be asked whether abolition of compound interest treats the symptom but misses an underlying cause: the overly wide approach taken to the mistake-based claim for unlawfully levied taxes by adhering to the declaratory theory of case law. This maintains the “fairy tale” that judges do not make or change the law, despite the powerful dissents of Lord Browne-Wilkinson and Lord Lloyd in Kleinwort Benson Ltd. v Lincoln City Council [1999] 2 A.C. 349 (HL). The application of this theory has the effect that a claimant is fictitiously deemed to have made a mistake even where payment of the taxes was in fact in line with the settled understanding of law at the time of payment. Consequently, the claimant can seek restitution of taxes beyond the six-year limitation period that would apply to an unjust enrichment claim based solely on ultra vires receipt by the Revenue. As noted above, it is the lack of a limitation period for certain mistake-based claims that causes such disruption to the public finances. Prudential Assurance rightly commented that the majority's approach in Kleinwort Benson was “straining the premise of theory” (at [63]). If the Supreme Court is willing to revisit the correctness of the House of Lords’ majority decision in Sempra Metals, it is to be hoped that it will be equally willing to revisit Kleinwort Benson at an opportune moment.
Thirdly, it is worth reflecting on the Supreme Court's relationship with academia over the law of unjust enrichment. The majority speeches in Sempra Metals heavily cited the writings of Professor Peter Birks. In contrast, the judgments in Prudential Assurance did not really engage with academic writings at all – despite a striking similarity between the Supreme Court's application of Investment Trust Companies to the question of compound interest and the arguments contained in R. Stevens (2018) 134 L.Q.R. 574 (an unpublished version of which had been read by members of the Supreme Court). This is not the first time that a criticism has been made of the currently constituted Supreme Court for a lack of appropriate citation: see A. Burrows (2017) 133 L.Q.R. 537, at 541–42, and P.S. Davies [2018] L.M.C.L.Q. 433, at 437–38. While past judgments may have over-cited academic texts in the field of restitution, it goes too far the other way not to cite commentary which may have contributed positively to the Court's reasoning.
