Inland Revenue & Anor v Deutsche Morgan Grenfell Group Plc

By its decision in Kleinwort Benson v. Lincoln City Council [1999] 2 AC 349 (“Kleinwort Benson”) the House of Lords abrogated the common law rule that no restitutionary claim lies in respect of money paid under a mistake of law, holding that the claimant bank was entitled to a restitutionary remedy in respect of sums paid to a local authority under an illegal transaction. The instant appeal raises a question of general importance as to the scope of the principle established by that decision. The question is whether the principle applies where the payment in question is a payment to the revenue on account of a supposed liability to tax (in the instant case, advance corporation tax (“ACT”)). The appellants on this appeal contend that it does not apply to such a payment, given (a) that statute provides for the recovery of tax overpaid by error or mistake in certain, albeit limited, circumstances (the statutory provision relating to overpayments of ACT is to be found in section 33 of the Taxes Management Act 1970 (“TMA”)); and (b) that, as the House of Lords held in Woolwich Equitable Building Society v. Inland Revenue Commissioners [1993] AC 70 (“Woolwich”), a party who has made a payment to the revenue pursuant to an unlawful demand is entitled as of right to a restitutionary remedy, regardless of whether in making the payment the payer was acting under any mistake of law.

The answer to the above question has significant limitation consequences. For it is common ground that whereas (absent fraud, concealment or mistake) a restitutionary claim based on the Woolwich principle will, by virtue of section 5 of the Limitation Act 1980 (“the 1980 Act”), become statute-barred on the expiry of six years after the payment was made, section 32(1)(c) of the 1980 Act provides that (subject to immaterial exceptions) the six-year limitation period for a claim for relief from the consequences of a mistake – including (as the House of Lords held in Kleinwort Benson) a mistake of law – does not start to run until the claimant has discovered the mistake or could with reasonable diligence have done so.

The question identified in paragraph 1 above did not arise directly for decision either in Woolwich or in Kleinwort Benson (in Woolwich the payment was a payment to the revenue but it was not made under a mistake of law; whereas in Kleinwort Benson the payment was made under a mistake of law but it was a payment under a private transaction and not a payment to the revenue). Nonetheless, in order to answer that question it is necessary to undertake a close examination of the reasoning of their Lordships in Woolwich and in Kleinwort Benson, and in particular that of Lord Goff of Chieveley, who gave the leading speech in each of the two cases. Indeed, distinguished leading counsel have devoted the greater part of the four-day hearing before the judge and the two-day hearing in this court to that task.

The appeal is brought by the Commissioners of Inland Revenue and Her Majesty’s Attorney-General, the defendants in the action, from an order made on 18 July 2003 by Park J whereby he entered judgment on liability in favour of Deutsche Morgan Grenfell Group plc (“DMG”), with quantum to be agreed between the parties.

The instant case is one of a large number of claims which have been brought against the appellants following the decision of the European Court of Justice (“the ECJ”) in the joined cases of Metallgesellschaft Ltd & Ors. v. Inland Revenue Commissioners and Attorney-General and Hoechst AG v. Inland Revenue and Attorney-General C-397/98 and C-410/98 [2001] STC 452 (“Metallgesellschaft”). I refer to Metallgesellschaft in some detail in Part VI of this judgment, but the following brief account of the decision may suffice by way of introduction.

In Metallgesellschaft, the claimant taxpayers challenged the legality of the provisions of the Income and Corporation Taxes Act 1988 (“ICTA”) relating to the imposition of a charge to ACT on dividends paid by a subsidiary resident in the UK to its parent, contending that the provisions in question contravened article 52 (now article 43) of the EC Treaty (freedom of establishment) in that they discriminated between those UK subsidiaries whose parent companies were resident in the UK and those whose parent companies were resident in other Member States. Since, in the event, the claimants had set off the sums paid by way of ACT against their subsequent liability for ‘mainstream’ corporation tax (as they were entitled to do under the provisions in question) they did not seek recovery of the sums paid; rather, they sought compensation to reflect the fact that the sums in question had been paid prematurely.

By its decision, which was delivered on 8 March 2001, the ECJ upheld the claimants’ challenge. It found that the statutory provisions in question contravened article 52, and that the claimants were entitled to compensation for premature payment. However, it left the assessment of the compensation, together with all ancillary matters, to the national court.

The judge’s decision in the instant case is one of a number of decisions which he has made in cases brought forward as test cases pursuant to a group litigation order, the purpose of which is to enable the claims arising from the ECJ’s decision in Metallgesellschaft to be managed in an orderly way.

In the instant case, DMG seeks relief against the appellants in respect of various payments of ACT made prematurely by DMG, including payments made on 14 October 1993 (“the 1993 payment”), 15 February 1995 (“the 1995 payment”) and 14 January 1996 (“the 1996 payment”). Its primary claim is for a restitutionary remedy, based on the ECJ decision in Metallgesellschaft. In the alternative, it claims damages for breach of statutory duty by the appellants in failing to ensure that the relevant statutory regime complied with Community law.

I shall have to refer to the pleadings in more detail later in this judgment, but I note at this stage that the claim form describes the claim as an unquantified claim for damages for breach of Community law, with no mention of any restitutionary claim. However, paragraph 13 of the Particulars of Claim, under the heading ‘Restitution and Compensation’, pleads that (in the alternative to the claim for damages for breach of statutory duty) DMG is entitled to compensation in respect of sums paid by way of ACT as set out in attached schedules (to which the 1993 payment, the 1995 payment and the 1996 payment were later added by amendment); subparagraph (B) of the particulars of loss and damage pleaded under paragraph 20 of the Particulars of Claim describes the compensation sought as being “for loss of use of the said ACT to be calculated from the dates of payment until the dates of set-off against [DMG’s] liability to mainstream corporation tax”; and the prayer for relief contains claims for ‘Restitution’ and ‘Compensation’, in addition to damages. The appellants have at no stage objected to the fact that the Particulars of Claim pleads a claim which does not appear in the claim form.

The appellants plead a limitation defence in relation to the 1993 payment, the 1995 payment and the 1996 payment. DMG counters by relying on section 32(1)(c) of the 1980 Act. The limitation issues so raised, which (as will become apparent) are of some considerable complexity, were the only issues which, pursuant to the group litigation order, fell to be decided by the judge in the instant case. He resolved those issues in favour of DMG, holding that none of the three payments in question was statute-barred. He entered judgment for DMG accordingly. The appellants petitioned the House of Lords under the leapfrog procedure for permission to appeal, but their petition was refused. Accordingly, with the permission of the judge, the appellants now appeal to this court.

The relevant provisions of the 1980 Act are as follows (so far as material):

“2.

Time limit for actions founded on tort

An action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued.

….

5.

Time limit for actions founded on simple contract

An action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued.

….

32.

Postponement of limitation period in case of fraud, concealment or mistake

(1)

…. where in the case of any action for which a period of limitation is prescribed by this Act, either –

(a)

…. ; or

(b)

…. ; or

(c)

the action is for relief from the consequences of a mistake;

the period of limitation shall not run until the plaintiff has discovered the …. mistake …. or could with reasonable diligence have discovered it.

….”

I turn next to TMA section 33. It is common ground that, for a reason which will become apparent, TMA section 33 does not apply in the instant case. However, the appellants rely heavily on the section in support of their arguments on this appeal.

The statutory ancestry of TMA section 33 can be traced back to section 24 of the Finance Act 1923, which laid down a three-year time limit in relation to claims based on error or mistake by a taxpayer relating to his liability to income tax under Schedule D. Section 26 of the Finance Act 1926 extended the time limit to six years. Sections 42 and 45 of the Finance Act 1927 extended the provision to cover surtax and income tax under Schedule E. Subsequently it was further extended to cover capital gains tax (in 1965) and corporation tax (in 1966). It now appears in TMA section 33, which provides as follows (so far as material):

“33.

Error or mistake

(1)

If any person who has paid tax charged under an assessment alleges that the assessment was excessive by reason of some error or mistake in a return, he may by notice in writing at any time not later than six years after the end of the year of assessment (or, if the assessment is to corporation tax, the end of the accounting period) in which the assessment was made, make a claim to the Board for relief.

(2)

On receiving the claim the Board shall inquire into the matter and shall, subject to the provisions of this section, give by way of repayment such relief in respect of the error or mistake as is reasonable and just:

Provided that no relief shall be given under this section in respect of an error or mistake as to the basis on which the liability of the claimant ought to have been computed where the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when the return was made.

(3)

In determining the claim the Board shall have regard to all the relevant circumstances of the case, and in particular shall consider whether the granting of relief would result in the exclusion from charge to tax of any part of the profits of the claimant, and for this purpose the Board may take into consideration the liability of the claimant and assessments made on him in respect of chargeable periods other than that to which the claim relates.

(4)

[Provision for appeals.]

(5)

In this section “profits” –

(a)

….,

(b)

….,

(c)

in relation to corporation tax, means profits as computed for the purposes of that tax.”

The reason why the section has no application in the instant case is that none of the payments in question was made under an assessment.

In summary, the respective contentions of the appellants and of DMG on this appeal are as follows.

The appellants contend that there are only two causes of action available to DMG in relation to the payments in question, that is to say (1) a claim for damages for breach of statutory duty (which, as is common ground, will become statute-barred six years from the date of payment, pursuant to section 2 of the 1980 Act) and (2) a cause of action in restitution based on the Woolwich principle (which, as is once again common ground, will also become statute-barred six years after the date of payment, pursuant, in this case, to section 5 of the 1980 Act). The appellants contend, in particular, that the Kleinwort Benson principle, properly analysed, does not extend to overpayments of tax.

In the alternative, the appellants contend that even if (contrary to their primary submission) the Kleinwort Benson principle extends to overpayments of tax, the mistake made by DMG in the instant case was not a mistake of such a nature as is capable of founding a claim based on that principle. This contention was not raised before the judge, but the appellants sought permission to raise it on appeal. DMG not objecting, we granted such permission.

The appellants accordingly contend that section 32(1)(c) of the 1980 Act has no application in the instant case; and that, whether DMG founds its claims on breach of statutory duty or on the Woolwich principle, the applicable limitation period in either case is six years from the date of the overpayment.

Thus, in relation to the 1993 payment, the appellants contend that since more than six years passed between the date when the payment was made (14 October 1993) and the date on which the claim form was issued (13 October 2000) DMG’s claim in respect of the 1993 payment is statute-barred. The 1995 payment and the 1996 payment were made less than six years before the issue of the claim form (they were made on 15 February 1995 and 14 January 1996 respectively), but the appellants contend that DMG’s claims in relation to those two payments were not brought until the date on which the schedules to the Particulars of Claim were amended to include such payments. It was agreed between the parties at an interlocutory stage that that date should be taken to be 19 August 2002 (i.e. more than six years after the payments were made). Thus the appellants contend that the 1995 payment and the 1996 payment are also statute-barred.

As already indicated, DMG accepts that the applicable limitation period in relation to the pleaded claim for damages for breach of statutory duty, and in relation to a restitutionary claim based on the Woolwich principle, is six years from the date of payment. However, it contends that it is also entitled to a restitutionary remedy on the Kleinwort Benson principle (a claim which, as indicated earlier, is pleaded in the alternative to the claim for damages for breach of statutory duty); and that its mistake in making the three payments in question was of such a nature as to engage section 32(1)(c).

As to the application of section 32(1)(c), DMG contends that it did not discover, and could not with reasonable diligence have discovered, its mistake until the ECJ gave its decision in Metallgesellschaft (8 March 2001), alternatively until the publication of the Advocate-General’s decision in Metallgesellschaft (12 September 2000). Accordingly it contends that the limitation period did not start to run in relation to any of the three payments in question until (at the earliest) 12 September 2000; and that in consequence its restitutionary claims are not statute-barred.

If and so far as necessary, it contends that for limitation purposes its claims in relation to each of the three payments in question were brought on the date on which the claim form was issued (13 October 2000).

In response, the appellants contend (so far as necessary) that DMG discovered its mistake by July 1995 at the latest, by which time it knew about the issues raised by the claimants in Metallgesellschaft (the appellants do not rely on the ‘reasonable diligence’ aspect of section 32(1)(c)); and that for limitation purposes the restitutionary claim in relation to the 1993 payment was not brought until the schedules to the Particulars of Claim were amended to include details of it (16 August 2001). Thus, the appellants contend that even if section 32(1)(c) is engaged, DMG’s claims in relation to all three payments are statute-barred.

The revenue further contends (so far as necessary) that it has a defence to DMG’s claims on the ground that the payments in question were made by DMG under a settled view or understanding of the law (referred to in argument as a ‘settled law defence’). This contention was not raised before the judge, but he gave the appellants permission to amend their Defence so as to raise it on appeal.

Thus the broad issues which arise on this appeal are as follows:

Since the above issues to some extent overlap, and since different groups of issues arise in relation to each of the three payments in question, it may be convenient to set out the particular issues which arise in relation to each such payment.

In this connection, I begin by noting two concessions by the appellants. First, the appellants accept that the 1993 payment and the 1995 payment (but not the 1996 payment) were made by DMG under a mistake of law, although there is an issue (the mistake of law issue) as to the precise nature of the mistake. As will be seen in due course, the judge held that, notwithstanding the decision of the ECJ in Metallgesellschaft, the ACT in question was due when it was paid, and that DMG’s mistake lay in its erroneous belief that it was not open to it to make a group income election. The appellants support that conclusion, submitting that a mistake of that nature cannot on any basis found an entitlement to a restitutionary remedy at common law. DMG, on the other hand, contends that its mistake lay in its erroneous belief that the statutory regime was lawful under Community law.

Second, the appellants accept that to the extent that the payments in question were made under a mistake of law (whatever the nature of that mistake), the losses in respect of which DMG seeks compensation were caused by that mistake. So causation is not in issue.

In the light of the above, the detailed issues which arise in relation to each of the three payments in issue are as set out below. The following table of dates may render what follows somewhat easier to assimilate:

14 October 1993 the 1993 payment

15 February 1995 the 1995 payment

July 1995 discovery of mistake (as alleged by the appellants)

14 January 1996 the 1996 payment

12 September 2000 A-G’s opinion in Metallgesellschaft

13 October 2000 issue of claim form

8 March 2001 ECJ decision in Metallgesellschaft

16 August 2001 amendment re the 1993 payment

19 August 2002 amendment re the 1995 payment and the 1996 payment.

A. If (as the appellants contend) DMG has no cause of action at common law for relief from the consequences of its mistake of law (for convenience I will refer to such a cause of action as ‘a cause of action for mistake of law’), then DMG’s restitutionary claim in relation to the 1993 payment will be statute-barred, since the 1993 payment was made more than six years before the commencement of proceedings. On the other hand:

A. If (as the appellants contend) DMG has no cause of action for mistake of law, then DMG’s claim in relation to the 1995 payment will be statute-barred only if the claim was not brought until the schedule to the Particulars of Claim was amended to include details of the payment (19 August 2002). On the other hand:

A. If (as the appellants contend) DMG has no cause of action for mistake of law, its claim in relation to the 1996 payment will be statute-barred only if the claim was not brought until 19 August 2002 – i.e. the claim in relation to the 1996 payment is in this respect in the same position as the claim in relation to the 1995 payment. On the other hand:

The appellants contend that in any event they have a ‘settled law defence’.

I gratefully adopt the judge’s summary of the relevant UK tax law in paragraphs 6 and 7 of his judgment, as follows:

“6.

At the times with which this case is concerned the general rule of United Kingdom tax law was that, if a company resident in the United Kingdom paid a dividend, it had to pay ACT to the revenue: ICTA s.14. The rate of ACT varied over the years. At the times with which the present case is concerned it was normally 25% of the dividend. In the usual case the amount so paid could be set off against the company’s normal liability to pay corporation tax on its profits, sometimes referred to as mainstream corporation tax or (as in this judgment) MCT. Where the ACT was so set off the payment of it did not cause the company to suffer an absolute loss of the money, because the set-off reduced on a pound for pound basis a later payment of MCT which the company would otherwise have had to make anyway. However, it did have the effect that the company had to pay some of its corporation tax bill early, so the ACT meant that the company suffered a timing disadvantage and the United Kingdom Revenue received a corresponding timing advantage. (There could be cases where a subsidiary had paid ACT and could not set it off against MCT. In such cases the ACT payment did represent an absolute loss of the money and not just a timing disadvantage. However, in the case of DMG all the relevant ACT payments were eventually set off against MCT, so that the disadvantage for which DMG seeks relief is a timing disadvantage only.)

7.

There was an exception to the rule that a company which paid a dividend had to pay ACT. If it was a subsidiary of a United Kingdom holding company the two companies could jointly make a group income election under section 247 of ICTA. The effect was that the subsidiary did not have to pay the ACT after all. It did still have to pay its full MCT when the due date came round, but the group income election removed the timing disadvantage. However, if the dividend-paying company was a subsidiary of a non-United Kingdom holding company the two companies could not make a group income election, so the subsidiary had to pay ACT and suffer the timing disadvantage, in circumstances where a subsidiary of a United Kingdom holding company, if it and its parent had made a group income election, did not. That was the feature of United Kingdom law which, in [Metallgesellschaft], the CJEC held to have been contrary to EC law and also to entitle the companies which had suffered from it to claim compensation or restitution. Where, as in this case and as in the case of the [groups of companies involved in Metallgesellschaft], the ACT had been set off against MCT, the compensation or restitution would be an amount calculated by reference to interest over the period from the payment of the ACT until it was set off against MCT….”

(For a more detailed account of the relevant statutory regime, reference may be made to paragraphs 3 to 25 of the ECJ’s judgment in Metallgesellschaft (at [2001] STC 480-483.)

I also gratefully adopt the judge’s account of the facts as set out in paragraphs 9 to 12 of his judgment, as follows:

“9.

At the times when the ACT payments relevant to this case were made the structure [of the group of which DMG was a member] was a little more complicated than a parent company with a 100% direct subsidiary, but nothing turns on the extra complications. The German holding company was DBAG. It was not the simple 100% owner of DMG. Instead it owned 14% of the shares in DMG directly. It owned all of the shares in DBI, an interposed United Kingdom holding company, and DBI owned the other 86% of the shares in DMG. ….

10.

According to the terms of ICTA s.247, group income elections could not have been made between DMG and DBAG or between DBI and DBAG, because DBAG was not a company resident in the United Kingdom. A group income election could have been made between DMG and DBI (because both companies were resident in the United Kingdom), but no such election was made. The reason was that, although an election would have enabled dividends to flow from DMG to DBI without ACT, onward dividends from DBI to DBAG would have had to be paid subject to a liability on the part of DBI to pay ACT: or at least that was how the matter appeared on the terms of the domestic United Kingdom legislation. In the circumstances DMG paid ACT by reference to all its dividends – the 86% of them paid to DBI as well as the 14% of them paid to DBAG – and DBI did not pay ACT when it paid onward dividends to DBAG. DBI did not have to pay ACT on those onward dividends because of the rules about franked investment income in ICTA ss.238 and 241.

11.

DMG has pleaded in this case, and the revenue admit, that, if section 247 had permitted group income elections to be made between a United Kingdom subsidiary and a parent company in another Member State, elections would have been made between DMG and DBI, between DMG and DBAG, and between DBI and DBAG. The corollary is that, because section 247 appeared clearly not to permit group income elections to which a parent company in another Member State was a party, the companies did not attempt to make group income elections. There is no doubt that, if they had attempted to make them, the revenue would have rejected the elections and pointed to the clear terms of the United Kingdom statute [i.e. ICTA] in justification of the rejection.

12.

Over the years several dividends flowed through from DMG to DBAG, either directly as to 14% of them or through DBI as to 86% of them. In the case of all of them DMG paid ACT. As respects some of the ACT payments no issue arises in the present case (because no limitation arguments arise), but as respects three dividends and associated ACT payments there are limitation issues in dispute which I must decide. ….

Since, as explained earlier, the whole of this drama is played out against the backcloth of the ECJ’s decision in Metallgesellschaft, and since there is an issue (the mistake of law issue) between the parties as to the effect of that decision, and hence as to the nature of DMG’s mistake of law, it is convenient to return to it at this point.

In Metallgesellschaft, the claimant companies, which were resident in Germany and which had subsidiaries resident in the UK, brought proceedings in the English High Court claiming compensation for the cashflow disadvantage which they had suffered by reason of their not being entitled to make a group income election under ICTA section 247, on the footing that the absence of such an entitlement amounted to an unjustified restriction on their freedom of establishment, contrary to article 52 (now article 43) of the EC Treaty.

Article 52 (now article 43) provides as follows (so far as material):

“[R]estrictions on the freedom of establishment of nationals of a Member State shall be abolished. …. Such …. abolition shall also apply to restrictions on the setting up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.”

The High Court stayed the proceedings and referred to the ECJ for a ruling on the following questions (among others): (i) whether in the circumstances article 52 had been infringed; and (ii) if so, whether the claimants were entitled, whether by way of restitution or by way of an award of damages, to a capital sum representing interest on the sums paid by way of ACT from the date the payments were made until the date when they were set off against mainstream corporation tax, notwithstanding that English law prohibited the payment of interest on a sum which was no longer owed.

Before the ECJ, the Commission submitted that the claimants were entitled to a restitutionary remedy, on the footing that the early receipt of the money by the revenue constituted a financial benefit which had been obtained in breach of Article 52, that is to say unlawfully. The UK government, on the other hand, submitted that the distinction drawn in the legislation between resident subsidiaries of resident parents and resident subsidiaries of non-resident parents was objectively justified and did not breach Article 52. In the result, the ECJ ruled that the distinction was discriminatory and not capable of objective justification, and that it was accordingly contrary to article 52. It further ruled that it was basic Community law that the right to a refund of charges levied in a Member State in breach of rules of Community law was a consequence of, and complementary to, rights conferred on individuals by that law; that the Member State was accordingly required to repay charges levied in breach of Community law; and that in the instant case the award of compensation in the form of a capital sum representing interest for the relevant period was essential in order to restore the equal treatment guaranteed by article 52, whether the claim was formulated as a claim for restitution or as a claim for damages.

In the course of his Opinion, which (as noted earlier) was published on 12 September 2000, the Advocate-General (Fennelly) said this:

“51.

…. The [ACT] payments made by the [claimants] were made on the basis of national legislation which allowed them no choice. Since such legislation is not compatible, in my view, with Community law, they should, in principle, be entitled to seek restitution for those payments.

52.

I believe that it is more correct and logical to treat the [claimants’] claims as restitutionary rather than as a compensatory claim for damages. [ACT] was, …., exacted from them in contravention of Community law and, therefore, unlawfully. In the period between payment of [ACT] and its being taken into account in respect of the corporation tax liability of the subsidiaries, it should have been repaid to the plaintiffs by the United Kingdom. If it had been possible to bring legal proceedings during this period, the [claimants] would, in my view, have been entitled to interest. It is neither logical nor just to deprive them of this entitlement merely because, in the meantime, the liability of the United Kingdom to repay the principal sum has been discharged. In a practical sense also, the claim for interest is closer to a restitutionary rather than a compensatory claim. The underlying sums are known and indisputable. All that is necessary is for the national court to establish an appropriate interest rate for the relevant period.”

The ECJ, addressing the first question on which its ruling was sought (whether the tax regime in question contravened article 52), said this in the course of its judgment:

“35.

By its first question, the national court is in substance asking whether it is contrary to arts. …. 52 …. of the EC Treaty for the tax legislation of a member state, such as that in issue in the main proceedings, to afford companies resident in that member state the possibility of benefiting from a taxation regime allowing them to pay dividends to their parent company without having to pay [ACT] where their parent company is also resident in that member state but to deny them that possibility where their parent company has its seat in another member state.

….

43.

With regard to the right to make a group income election, the legislation in question creates a difference in treatment between subsidiaries resident in the United Kingdom depending on whether or not their parent company has its seat in the United Kingdom. Resident subsidiaries of companies having their seat in the United Kingdom may, subject to certain conditions, avail themselves of the group income regime and thus be relieved of the obligation to pay [ACT] when distributing dividends to their parent companies. By contrast, that advantage is denied to the resident subsidiaries of companies not having their seat in the United Kingdom and which are therefore obliged to pay [ACT] whenever they distribute dividends to their parent companies.

….

76.

The answer to the first question must therefore be that it is contrary to art 52 of the EC Treaty for the tax legislation of a member state, such as that in issue in the main proceedings, to afford companies resident in that member state the possibility of benefiting from a taxation regime allowing them to pay dividends to their parent company without having to pay [ACT] where their parent company is resident in that member state but to deny them that possibility where their parent company has its seat in another member state.”

The ECJ then turned to the second question on which its ruling was sought: whether a subsidiary resident in the UK which has been wrongfully deprived of the benefit of a taxation regime which would have enabled it to pay dividends to its parent company resident in another Member State without incurring a charge to ACT is entitled by way of compensation to a capital sum representing interest on the payments in question from the date of payment until the date of set off, notwithstanding that English law prohibits the payment of interest on a principal sum which is not due. Addressing that question, the ECJ said this:

“77.

Having regard to the answer given in the first question, the second question seeks in substance to ascertain whether, on a proper construction of art 52 of the EC Treaty, where a subsidiary resident in the member state concerned and its parent company having its seat in another member state have been wrongfully deprived of the benefit of a taxation regime which would have enabled the subsidiary to pay dividends to its parent company without having to pay advance corporation tax, that subsidiary and/or its parent company are/is entitled to obtain a sum equal to the interest accrued on the advance payments made by the subsidiary from the date of those payments until the date on which the tax became chargeable, even when the national law prohibits the payment of interest on a principal sum which is not due. The national court frames that question in two hypotheses: in the first alternative, where the claim by the subsidiary and/or parent company is made in an action for restitution of taxes levied in breach of Community law and, in the second, where the claim is made in an action for compensation for damage resulting from the breach of Community law.

78.

The United Kingdom government maintains, first, that if it should be held that it was contrary to Community law to deny resident subsidiaries of parent companies not resident in the United Kingdom the benefit of the group income election regime, Community law would require that breach to be remedied, not through an action for restitution but through an action brought against the state for damages for loss occasioned by its breach of Community law. In its view, advance corporation tax is not a tax levied contrary to Community law, since subsidiaries are in any event bound to pay by way of mainstream corporation tax the sums paid by way of advance corporation tax. It is the fact that the United Kingdom legislature failed to provide for the possibility of a resident subsidiary and its non-resident parent making a group income election that is at the origin of the disputes in the main proceedings and that might cause the United Kingdom to incur non-contractual liability. In R v Secretary of State for Social Security, ex p Sutton (Case C-66/95) [1997] ECHRI-2163, the court held, in particular, that in the case of damage arising out of breach of a directive, Community law does not require a member state to pay a sum equivalent to the interest on a sum paid late, in that case arrears of social security benefits. From this the United Kingdom government concludes that Community law does not require interest to be paid in respect of the loss of use of a sum of money for a certain period on account of the advance levying of a tax contrary to Community law.

79.

Second, the United Kingdom government argues that, even if the plaintiffs’ claims were to be treated as claims for recovery of sums paid in breach of Community law, such claims cannot be upheld inasmuch as settled case law states that it is for national law to determine whether interest is payable in connection with reimbursement of charges improperly levied in the light of Community law. Under English law, entitlement to interest depends on whether or not proceedings were commenced before payment of the sum on which interest is claimed.

80.

In consequence, the United Kingdom, government submits that the plaintiffs in the main proceedings cannot claim interest under a claim for restitution or for damages inasmuch as the principle sums claimed were repaid by set-off of advance corporation tax against the amounts due by way of mainstream corporation tax payable by the subsidiaries before the proceedings were brought.

81.

It must be stressed that it is not for the court to assign a legal classification to the actions brought by the plaintiffs before the national court. In the circumstances, it is for Metallgesellschaft and others and Metallgesellschaft 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.

82.

First, on the assumption that the actions brought by the plaintiffs in the main proceedings are to be treated as claims for restitution of a charge levied in breach of Community law, the question is whether, in circumstances such as those in the main proceedings, a breach of art 52 of the EC treaty by a member state entitles taxpayers to reimbursement of interest accrued on the tax they have paid from the date of its premature payment until the date on which it properly fell due.

83.

It is important to bear in mind in this regard that what is contrary to Community law, in the disputes in the main proceedings, is not the levying of a tax in the United Kingdom on the payment of dividends by a subsidiary to its parent company but the fact that subsidiaries, resident in the United Kingdom, of parent companies having their seat in another member state were required to pay that tax in advance whereas resident subsidiaries of resident parent companies were able to avoid the requirement.

84.

According to well-established case law, the right to a refund of charges levied in a member state in breach of rules of Community law is the consequence and complement of the rights conferred on individuals by Community provisions as interpreted by the court… The member state is therefore required in principle to repay charges levied in breach of Community law …

85.

In the absence of Community rules on the restitution of national charges that have been improperly levied, it is for the domestic legal system of each member state to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, provided first, that such rules are not less favourable than those governing similar domestic actions (principle of equivalence) and, second, that they do not render practically impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness)…

86.

It is likewise for national law to settle all ancillary questions relating to the reimbursement of charges improperly levied, such as payment of interest, including the rate of interest and the date from which it must be calculated …

87.

In the main proceedings, however, the claim for payment of interest covering the cost of loss of the use of the sums paid by way of advance corporation tax is not ancillary, but is the very objective sought by the plaintiffs’ actions in the main proceedings. In such circumstances, where the breach of Community law arises, not from the payment of the tax itself but from its being levied prematurely, the award of interest represents the reimbursement of that which was improperly paid and would appear to be essential in restoring the equal treatment guaranteed by art 52 of the EC Treaty.

88.

The national court has said that it is in dispute whether English law provides for restitution in respect of damage arising from loss of the use of sums of money where no principal sum is due. It must be pointed out that in an action for restitution the principal sum due is 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.

89.

Consequently, art 52 of the EC Treaty entitles a subsidiary resident in the United Kingdom and/or its parent company having its seat in another member state to obtain interest accrued on the advance corporation tax paid by the subsidiary during the period between the payment of advance corporation tax and the date on which mainstream corporation tax became payable, and that sum may be claimed by way of restitution.”

The ECJ accordingly answered the second question in the following terms (in paragraph 96 of its judgment):

“96.

Where a subsidiary resident in one member state has been obliged to pay advance corporation tax in respect of dividends paid to its parent company having its seat in another member state even though, in similar circumstances, the subsidiaries of parent companies resident in the first member state were entitled to opt for a taxation regime that allowed them to avoid that obligation, art 52 of the EC Treaty requires that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they sustained and from which the authorities of the member state concerned have benefited as a result of the advance payment of tax by the subsidiaries.

The mere fact that the sole object of such an action is the payment of interest equivalent to the financial loss suffered as a result of the loss of use of the sums paid prematurely does not constitute a ground for dismissing such an action.

While, 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, those rules must not render practically impossible or excessively difficult the exercise of rights conferred by Community law.”

I will return to Metallgesellschaft later in this judgment, when addressing the mistake of law issue.

I turn next to the authorities in this jurisdiction.

The principal authorities in this jurisdiction which were cited to us in the course of argument were as follows. As already noted, the two authorities which are of central relevance to the cause of action issue are the decisions of the House of Lords in Woolwich and Kleinwort Benson. Kleinwort Benson is also of central relevance to the mistake of law issue and to the section 32(1)(c) issues. Also cited to us on the cause of action issue were British Steel plc v. Customs & Excise Commissioners [1997] 2 All ER 366 CA (“British Steel”), Eagerpath Ltd v. Edwards (1999) 73 TC 427 CA (“Eagerpath”), and the House of Lords’ decision in Marcic v. Thames Water Utilities Ltd [2003] 3 WLR 1603 HL (“Marcic”). On the section 32(1)(c) issues we were referred to Nurdin & Peacock plc v. D. B. Ramsden & Co Ltd [1999] 1 WLR 1249 (a decision of Neuberger J) (“Nurdin”).

Also cited to us on the cause of action issue was the decision of the Queens Bench Division (Northern Ireland) in Mallusk Cold Storage Ltd v. Dept of Finance and Personnel [2003] QBD (NI) 370 (“Mallusk”).

It is convenient to refer to these authorities at this stage. I take them in chronological order.

In Woolwich the building society challenged the validity of transitional provisions in the Income Tax (Building Societies) Regulations 1986 on the ground that they were ultra vires. The regulations in question required the building society to pay income tax on dividends and interest which it had paid to its members. The payments of income tax were to be made on specified quarterly dates.

The building society decided to pursue its challenge by way of proceedings for judicial review, but in order to avoid adverse publicity and the imposition of penalties, it paid three instalments of tax in accordance with the regulations but on a without prejudice basis. There was thus no question of the payments having been made under any mistake of law.

The judge at first instance in the judicial review proceedings upheld the building society’s challenge. The Court of Appeal reversed his decision, but the House of Lords restored it. In due course the revenue repaid the tax, with interest from the date of the judge’s decision; but it refused to pay interest in respect of any earlier period.

The building society then commenced fresh proceedings against the revenue claiming interest from the dates on which the respective payments were made until the date of the judge’s decision, on the ground that the payments had been made pursuant to an unlawful demand. The judge at first instance dismissed the building society’s claim, but the Court of Appeal reversed his decision. The House of Lords, by a majority (Lord Goff of Chieveley, Lord Browne-Wilkinson and Lord Slynn of Hadley; Lord Keith of Kinkel and Lord Jauncey of Tullichettle dissenting), dismissed the revenue’s appeal.

As I have already indicated, the relevance of the decision in Woolwich for present purposes lies in the reasoning of the majority of their Lordships (and in particular the speech of Lord Goff), and in the analysis of Woolwich in Kleinwort Benson (where, once again, the speech of Lord Goff is of central relevance).

I turn first to the speech of Lord Goff in Woolwich. At the commencement of his speech (p.163C) he identified the question which lay at the heart of the appeal as being:

“…. whether money exacted as taxes from a citizen by the revenue ultra vires is recoverable by the citizen as of right”.

He went on to describe that question as being of importance for the future of the law of restitution, since a decision of the House of Lords “could have a profound effect upon the structure of this part of our law” (p.163G).

Turning to the authorities, Lord Goff encapsulated their effect in number of propositions, as follows (at p.164D-166B):

“(1)

Whereas money paid under a mistake of fact is generally recoverable, as a general rule money is not recoverable on the ground that it was paid under a mistake of law. This principle was established in Bilbie v Lumley (1802) 2 East 469. It has however been the subject of much criticism, which has grown substantially during the second half of the present century. The principle had [sic] been adopted in most, if not all, Commonwealth countries; though in some it has now been modified or abandoned, either by statute or by judicial action. No such principle applies in civil law countries, and its adoption by the common law has been criticised by comparative lawyers as unnecessary and anomalous. This topic is the subject of the Consultation Paper No. 120 published by the Law Commission last year, in which serious criticisms of the rule of non-recovery are rehearsed and developed, and proposals for its abolition are put forward for discussion

(2)

But money paid under compulsion may be recoverable. In particular: (a) money paid as a result of actual or threatened duress to the person, or actual or threatened seizure of a person’s goods, is recoverable. For an example of the latter, see Maskell v Horner [1915] 3 K.B. 106. Since these forms of compulsion are not directly relevant for present purposes, it is unnecessary to elaborate them; but I think it pertinent to observe that the concept of duress has in recent years been expanded to embrace economic duress.

(b)

Money paid to a person in a public or quasi-public position to obtain the performance by him of a duty which he is bound to perform for nothing or for less than the sum demanded by him is recoverable to the extent that he is not entitled to it. Such payments are often described as having been demanded colore officii. There is much abstruse learning on the subject (see, in particular, the illuminating discussion by Windeyer J. in Mason v New South Wales, 102 C.L.R. 108, 139-142), but for present purposes it is not, I think, necessary for us to concern ourselves with this point of classification. ….

(c)

Money paid to a person for the performance of a statutory duty, which he is bound to perform for a sum less than that charged by him, is also recoverable to the extent of the overcharge. ….

(d)

In cases of compulsion, a threat which constitutes the compulsion may be expressed or implied ….

(e)

I would not think it right, especially bearing in mind the development of the concept of economic duress, to regard the categories of compulsion for present purposes as closed.

(3)

Where a sum has been paid which is not due, but it has not been paid under a mistake of fact or under compulsion as explained under (2) above, it is generally not recoverable. Such a payment has often been called a voluntary payment. In particular, a payment is regarded as a voluntary payment and so as irrecoverable in the following circumstances.

(a)

The money has been paid under a mistake of law: see (1) above. ….

(b)

The payer has the opportunity of contesting his liability in proceedings, but instead gives way and pays …. So where money has been paid under pressure of actual or threatened legal proceedings for its recovery, the payer cannot say that for that reason the money has been paid under compulsion and is therefore recoverable by him. If he chooses to give way and pay, rather than obtain the decision of the court on the question whether the money is due, his payment is regarded as voluntary and so is not recoverable ….

(c)

The money has otherwise been paid in such circumstances that the payment was made to close the transaction. Such would obviously be so in the case of a binding compromise; but even where there is no consideration for the payment, it may have been made to close the transaction and so be irrecoverable. Such a payment has been treated as a gift ….

(4)

A payment may be made on such terms that it has been agreed, expressly or impliedly, by the recipient that, if it shall prove not to have been due, it will be repaid by him. In that event, of course, the money will be repayable…. On the other hand, the mere fact that money is paid under protest will not give rise of itself to the inference of such an agreement; though it may form part of their evidence from which it may be inferred that the payee did not intend to close the transaction ….”

Lord Goff continued (at p.166B-C):

“The principles which I have just stated had come to be broadly accepted, at the level of the Court of Appeal, at least by the early part of this century. But a formidable argument has been developed in recent years by leading academic lawyers that this stream of authority should be the subject of reinterpretation to reveal a different line of thought pointing to the conclusion that money paid to a public authority pursuant to an ultra vires demand should be repayable, without the need to establish compulsion, on the simple ground that there was no consideration for the payment.”

Lord Goff went on to refer in this connection to an essay by Professor Birks in which he reviewed the authorities, referring in particular to an obiter dictum of Atkin LJ in A-G v. Wilts United Dairies Ltd 37 TLR 884 at 887 to the effect that a payment to a public authority under an ultra vires demand, if made under protest, was recoverable on the simple ground that it was a sum received by the public authority to the use of the citizen. Lord Goff also referred to an obiter dictum of Dixon CJ in Mason v. New South Wales 102 CLR 108 at 117 as an example of a similar approach. Lord Goff observed (at p.168D) that the principle of justice expressed in these dicta, and in other authorities, still called for attention. He continued:

“…. the central question in the present case is whether your Lordships’ House, deriving their inspiration from the example of those two great judges, should rekindle that fading flame and reformulate the law in accordance with that principle. I am satisfied that, on the authorities, it is open to your Lordships’ House to take that step. The crucial question is whether it is appropriate for your Lordships to do so.”

Lord Goff then turned to the relevant statutory provisions. With reference to TMA section 33, Lord Goff said this (at p169B-170D):

“There is some doubt whether this section is in any event applicable in the case of composite rate tax, which was the tax demanded of Woolwich in the present case. By [TMA] section 118(1), the interpretation section of the Act, it is provided that, where neither income tax nor capital gains tax nor corporation tax is specified, the word ‘tax’ means any of those taxes. Composite rate tax is not defined as falling within the description of income tax, but only as ‘an amount representing income tax’: see section 343 of the Income and Corporation Taxes Act 1970. However there is, in my opinion, a more fundamental reason why the section has no application in the present case. This is because the present case is not one in which an excessive assessment was made on a taxpayer, through some error of fact or law, as is contemplated by section 33(1). This is a case where there was no lawful basis whatever for any demand of tax to be made by the revenue. In such circumstances, the demand itself is ultra vires and is therefore a nullity. It follows that in a case such as the present one there can be no valid assessment. No assessment was in fact raised on Woolwich in the present case, because the money alleged to be due by way of tax was paid, though under protest. It was pointed out in argument that, pursuant to regulation 7 of the Income Tax (Building Societies) Regulations 1986, tax which was due but not paid on or before the due date could have been the subject of an assessment on Woolwich under paragraph 4(2) or (3) of Schedule 20 to the Finance Act 1972; but for the reasons I have already given any such assessment would, in my opinion, have been a nullity in the circumstances of the present case. In particular, I do not see how there could have been an appeal against such an assessment pursuant to paragraph 10(3) of Schedule 20; because such an appeal presupposes an assessment which, apart from the impugned error, would otherwise have been valid. If the assessment is alleged to have been made (as here) under ultra vires regulations, the proper course is to take proceedings by way of judicial review to quash the aberrant regulations and the assessment made thereunder, not by way of an appeal under procedure which presupposes that the assessment, although it may be erroneous, is basically lawful. Just as the appeal procedure presupposes a lawful assessment, so does section 33(1() of the Act of 1970, which is concerned with a lawful assessment which is excessive by reason of some error or mistake in a return. ….

This is, in my opinion, a point of some significance in the present case. It is for these reasons that Woolwich is not enabled or required to seek its remedy through the statutory framework, but must fall back on the common law. It also follows that the common law principles, whatever they may be, are applicable to a case such as the present, unconstrained by the provisions of any statute. It was submitted by Mr. Glick that statutory provisions creating a discretionary regime for the repayment of taxes or charges presuppose that the common law principles give no right to recovery. Historically, that may be correct; but having, where applicable, overlaid and replaced the common law principles, whatever those principles may be, they become neutral in their effect when the development of those principles is considered by the courts. Of course, Mr. Glick was fully entitled to point out to your Lordships that the vast majority of cases concerned with the recovery of tax which is not due will indeed be covered by statutory provisions regulating the right of recovery; he also suggested that, if it should be held that section 33 has no application in the present case, steps can easily, and may well, be taken at an early opportunity to bring cases such as the present, which are in any event likely to be very rare, within its ambit. These are practical considerations, the force of which I accept and understand. But in my opinion they cannot, in the last analysis, touch the point of principle, which is that we are here concerned with the question of the basis of the common law right of recovery in these circumstances, upon which statute law has no direct impact.”

At p.171F Lord Goff turned to the building society’s primary submission:

“…. that your Lordships’ House should, despite the authorities to which I have referred, reformulate the law so as to establish that the subject who makes a payment in response to an unlawful demand of tax acquires forthwith a prima facie right in restitution to the repayment of the money.”

Addressing that submission, Lord Goff said this (at pp.171G-172C):

“The justice underlying Woolwich’s submission is, I consider, plain to see. Take the present case. The revenue has made an unlawful demand for tax. The taxpayer is convinced that the demand is unlawful, and has to decide what to do. It is faced with the revenue, armed with the coercive power of the state, including what is in practice a power to charge interest which is penal in its effect. In addition, being a reputable society which alone among many building societies is challenging the lawfulness of the demand, it understandably fears damage to its reputation if it does not pay. So it decides to pay first, asserting that it will challenge the lawfulness of the demand in litigation. Now, Woolwich having won that litigation, the revenue asserts that it was never under any obligation to repay the money, and that it in fact repaid it only as a matter of grace. There being no applicable statute to regulate the position, the revenue has to maintain this position at common law.

Stated in this stark form, the revenue’s position appears to me, as a matter of common justice, to be unsustainable; and the injustice is rendered worse by the fact that it involves, as Nolan J. pointed out [1989] 1 W.L.R. 137, 140, the revenue having the benefit of a massive interest-free loan as the fruit of its unlawful action. I turn then from the particular to the general. Take any tax or duty paid by the citizen pursuant to an unlawful demand. Common justice seems to require that tax be repaid, unless special circumstances or some principle of policy require otherwise; prima facie, the taxpayer should be entitled to repayment as of right.”

Lord Goff went on to consider a number of possible objections to what he described as “the simple call of justice”. The first was the historical fact that English law had not developed so as to recognise an action for the recovery of money on the ground that it was not due (condictio indebiti); instead, it had recognised actions at common law for the recovery of money paid under a mistake of fact, and under certain forms of compulsion. Lord Goff continued (at p.172D):

“What is now being sought is, in a sense, a reversal of that development, in a particular type of case; and it is said that it is too late to take that step. To that objection, however, there are two answers. The first is that the retention by the state of taxes unlawfully exacted is particularly obnoxious, because it is one of the most fundamental principles of our law – enshrined in a famous constitutional document, the Bill of Rights 1688 – that taxes should not be levied without the authority of Parliament; and full effect can only be given to that principle if the return of taxes exacted under an unlawful demand can be enforced as a matter of right. The second is that, when the revenue makes a demand for tax, that demand is implicitly backed by the coercive powers of the state and may well entail (as in the present case) unpleasant economic and social consequences if the taxpayer does not pay. In any event, it seems strange to penalise the good citizen, whose natural instinct is to trust the revenue and pay taxes when they are demanded of him.”

The second objection identified by Lord Goff was that (as Mr Ian Glick QC, for the revenue, had submitted) the development of the law in this area was a matter for Parliament, and not for the courts. Mr Glick had further submitted that it would be impossible for the House of Lords, were it to accept the building society’s argument, to set the appropriate limits to the principle; and that an unqualified right to recover overpaid taxes and duties subject only to the usual six-year time bar would be unacceptable. Addressing these submissions, Lord Goff recognised that what he described as “the armoury of common law defences” might be inapposite to a claim to recover tax paid under an unlawful demand. He continued (at p.174E):

“It may well therefore be necessary to have recourse to other defences, such as for example short time limits within which such claims have to be advanced.”

After referring to German law as “an instructive example” of such a regime, Lord Goff continued:

“At this stage of the argument, I find it helpful to turn to recent developments in Canada. First, in a notable dissenting judgment …. in Hydro Electric Commission of Township of Nepean v. Ontario Hydro (1982) 132 D.L.R. (3d) 193, 201-211 [“Hydro Electric”], Dickson J. subjected the rule against recovery of money paid under a mistake of law to a devastating analysis and concluded that the rule should be rejected. His preferred solution was that, as in cases of mistake of fact, money paid under a mistake of law should be recoverable if it would be unjust for the recipient to retain it. Next, in the leading case of Air Canada v. British Columbia, 59 D.L.R. (4^th) 161 [“Air Canada”], the question arose whether money in the form of taxes paid under a statute held to be ultra vires was recoverable. It is impossible for me, for reasons of space, to do more than summarise the most relevant parts of the judgments of the Supreme Court of Canada. Of the seven judges who heard the appeal, four thought it necessary to consider whether the taxes paid were recoverable at common law. The leading judgment was delivered by La Forest J., with whom Lamer and L’Heureux-Dubé JJ. agreed. First, he decided, at p. 192, to follow Dickson J’s lead, and to hold that the distinction between mistake of fact and mistake of law should play no part in the law of restitution. This did not however imply that recovery would follow in every case where a mistake had been shown to exist: “If the defendant can show that the payment was made in settlement of an honest claim, or that he has changed his position as a result of the enrichment, then restitution will be denied.” However he went on to hold, at p. 193, that, where “unconstitutional or ultra vires levies” are in issue, special considerations arose. These were twofold. First, if the plaintiff had passed on the relevant tax to others, the taxing authority could not be said to have been unjustly enriched at the plaintiff’s expense, and he was not therefore entitled to recover. As La Forest J. said, at p. 193: “The law of restitution is not intended to provide windfalls to plaintiffs who have suffered no loss.” On that basis alone, he held that the plaintiff’s claim in the case before the court must fail. However, he went on to hold that the claim failed on another ground, viz., that as a general rule there will, as a matter of policy, be no recovery of taxes paid pursuant to legislation which in unconstitutional or otherwise invalid. Basing himself on authority from the United States, La Forest J. concluded that any other rule would at best be inefficient, and at worst could lead to financial chaos: see pp. 194-197. The rule against recovery should not however apply where a tax is exacted, not under unconstitutional legislation, but through a misapplication of the law. He added, at p. 198, that, in his opinion, if recovery in all cases is to be the general rule, then that was best achieved through the route of statutory reform.

Wilson J dissented. She did not think it necessary to consider whether the old rule barring recovery of money paid under mistake of law should be abolished, though had she thought it necessary to do so, she would have followed the approach of Dickson J. She considered, at p.169, that money paid under unconstitutional legislation was generally recoverable:

“The taxpayer, assuming the validity of the statute as I believe it is entitled to do, considers itself obligated to pay. Citizens are expected to be law-abiding. They are expected to pay their taxes. Pay first and object later is the general rule. The payments are made pursuant to a perceived obligation to pay which results from the combined presumption of constitutional validity of duly enacted legislation and the holding out of such validity by the legislature. In such circumstances I consider it quite unrealistic to expect the taxpayer to make its payments ‘under protest.’ Any taxpayer paying taxes exigible under a statute which it has no reason to believe or suspect is other than valid should be viewed as having paid pursuant to the statutory obligation to do so.”

Furthermore, she was unable to accept the view of La Forest J. that the principle of recovery should be reversed for policy reasons. She spoke in forthright terms, at p.169:

“What is the policy that requires such a dramatic reversal of principle? Why should the individual taxpayer, as opposed to taxpayers as a whole, bear the burden of government’s mistake? I would respectfully suggest that it is grossly unfair that X, who may not be (as in this case) a large corporate enterprise, should absorb the cost of government’s unconstitutional act. If it is appropriate for the courts to adopt some kind of policy in order to protect government against itself (and I cannot say that the idea particularly appeals to me), it should be one that distributes the loss fairly across the public. The loss should not fall on the totally innocent taxpayer whose only fault is that it paid what the legislature improperly said was due.”

She also rejected, at pp.169-170, the proposed defence of “passing on.” Accordingly in her opinion the taxpayer should be entitled to succeed.

I cannot deny that I find the reasoning of Wilson J. most attractive. Moreover I agree with her that, if there is to be a right of recovery in respect of taxes exacted unlawfully by the revenue, it is irrelevant to consider whether the old rule barring recovery of money paid under mistake of law should be abolished, for that rule can have no application where the remedy arises not from error on the part of the taxpayer, but from the unlawful nature of the demand by the revenue. Furthermore, like Wilson J., I very respectfully doubt the advisability of imposing special limits upon recovery in the case of “unconstitutional or ultra vires levies.” I shall revert a little later to the defence of passing on.

In all the circumstances, I do not consider that Mr. Glick’s argument, powerful though it is, is persuasive enough to deter me from recognising, in law, the force of the justice underlying Woolwich’s case.”

At p.177F Lord Goff expressed his conclusion as follows:

“I would therefore hold that money paid by a citizen to a public authority in the form of taxes or other levies paid pursuant to an ultra vires demand by the authority is prima facie recoverable by the citizen as of right. As at present advised, I incline to the opinion that this principle should extend to embrace cases in which tax or other levy has been wrongly exacted by the public authority not because the demand was ultra vires but for other reasons, for example because the authority misconstrued a relevant statute or regulation. It is not however necessary to decide the point in the present case, and in any event cases of this kind are generally the subject of statutory regimes which legislate for the circumstances in which money so paid either must or may be repaid. Nor do I think it necessary to consider for the purposes of the present case to what extent the common law may provide the public authority with a defence to a claim for the repayment of money so paid; though for the reasons I have already given, I do not consider that the principle of recovery should be inapplicable simply because the citizen has paid the money under a mistake of law. It will be a matter for consideration whether the fact that the plaintiff has passed on the tax or levy so that the burden has fallen on another should provide a defence to his claim. Although this is contemplated by the European Court of Justice in the San Giorgio case, it is evident from [Air Canada] that the point is not without its difficulties; and the availability of such a defence may depend upon the nature of the tax or other levy. No doubt matters of this kind will in any event be the subject of consideration during the current consultations with the Law Commission.”

Lord Browne-Wilkinson, agreeing with Lord Goff, concluded (at p.198H) that there were sound reasons by way of analogy for establishing the law in the sense proposed by Lord Goff. At p.197E he described the case as:

“…. the paradigm of a case of unjust enrichment.”

Lord Slynn, also agreeing with Lord Goff on the central question, addressed a number other issues which had arisen in the course of argument. The first of those issues is of no materiality for present purposes. However, Lord Slynn continued:

“Secondly, this is not a case where the tax was paid under a mistake of law made by the payer and the revenue thus cannot, and does not, rely on the authorities which rule that a claim for money had and received does not lie where it was paid under a mistake of law. It is thus not necessary in this case to consider whether that rule is well founded, though it seems to me that it is open to review by your Lordships’ House.

Thirdly there is, as I see it, no statutory provision upon which Woolwich can rely to reclaim this money or any interest. [TMA] section 33, even if it applies to composite rate tax, is not applicable for a number of reasons, not least that no valid assessment could be made under an invalid regulation, that no assessment was in fact made and that, even if made, the assessment could not on the facts of the present case have been said to be ‘excessive by reason of some error or mistake in a return’: section 33(1). In other areas Parliament has specifically provided that tax paid which was not lawfully due to be paid may be recovered and it has laid down the machinery and the conditions for repayment, including the payment of interest. None of these other statutory provisions applies to the present case.

I do not consider that the fact that Parliament has legislated extensively in this area means that no principle of recovery at common law can or should at this stage of the development of the law be found to exist. If the principle does exist that tax paid on a demand from the Crown when the tax was the subject of an ultra vires demand can be recovered as money had and received then, in my view, it is for the courts to declare it. In so doing they do not usurp the legislative function. I regard the proper approach as the converse. If the legislature finds that limitations on the common law principle are needed for reasons of policy or good administration then they can be adopted by legislation, e.g.. by a short limitation period, presumptions as to validity, even (which I mention but do not necessarily think appropriate since the matter has not been discussed) a power in the courts to limit the effects of any order for recovery comparable to that conferred on the European Court of Justice by article 174 of the E.E.C. Treaty (Cmnd. 5179-II). Because of the other legislative provisions dealing with repayment of various taxes it seems in any event that the number of cases where any principle of common law would need to be relied on is likely to be small. The ‘flood gates’ argument is therefore not a persuasive one in this case. If it were a risk, then the revenue would need to consider appropriate legislation.”

In British Steel the claimant company paid excise duty on hydrocarbon oil used in its blast furnaces, pursuant to section 6(1) of the Hydrocarbon Oil Duties Act 1979, whilst consistently contending that it was entitled to relief under section 9(1) of that Act on the ground that the oil was not used as fuel. The Commissioners of Customs & Excise consistently rejected that contention.

The claimant brought an action against the Commissioners claiming restitution of the excise duty which it had paid on the basis that it qualified for relief, and that the Commissioners’ demands for payment of the duty had accordingly been unlawful. A preliminary issue was directed as to whether it was open to the claimant to challenge the Commissioners’ decision otherwise than by way of judicial review. The judge at first instance held that a claim for repayment of the duty could be brought only under the procedure prescribed by section 9(4) of the relevant Act, and that a complaint by the claimant that it had not been afforded relief under section 9 could only be pursued in judicial review proceedings. The claimant appealed.

The headnote in the report of British Steel in the Court of Appeal includes (at p.366h) a reference to a concession by the Commissioners that a mistake by them on the issue whether the plaintiff qualified for relief would have been a mistake going to jurisdiction; and that if relief had been refused on an erroneous basis, the decision to refuse relief would have been unlawful.

The relevance of British Steel for present purposes is that it is relied on by the appellants as an early application by the Court of Appeal of the Woolwich principle.

The leading judgment was given by Sir Richard Scott V-C. At p.374f-g he identified the points for decision, as follows:

“So there are, in my opinion, two points for decision on this appeal. First, if relief from duty under section 9(1) was unlawfully refused, does it follow that the demands for duty under section 6 were unlawful? Second, if the demands for duty were unlawful, can a common law action for restitution be brought or is the payer restricted to such repayment remedy as may be available under section 9(4)?”

The Vice-Chancellor addressed the second of those two points first, as follows (at pp.374j-376h):

“If the demands by the commissioners for excise duty to be paid on the hydrocarbon oil to be delivered to British Steel’s blast furnaces were unlawful demands, it would follow, in my opinion, from the decision of the House of Lords in [Woolwich] that whoever paid the duty would have a common law restitutionary right to repayment.

…

In the present case, it is contended that the commissioners’ demand for excise duties was unlawful because the commissioners had made an error in deciding that the use of the oil in the British Steel blast furnaces was not a ‘qualifying use’ and, consequently, had wrongly refused to grant relief from duty under s 9(1). I have yet to examine whether that premise justifies a conclusion that the demands were unlawful; but, if it does, I can see no reason why the principle expressed by Lord Goff should not apply.

An unlawful demand for duty must, in a sense, always be an ultra vires demand. Whether the demand is based on ultra vires regulations, or on a mistaken view of the legal effect of valid regulations, or on a mistaken view of the facts of the case, it will, as it seems to me, be bound to be a demand outside the taxing power conferred by the empowering legislation. If, for any of these reasons, a demand for tax is an unlawful demand, it seems to me to follow from the speeches of the majority in [Woolwich] that the taxpayer would, prima facie, become entitled, on making payment pursuant to the unlawful demand, to a common law restitutionary right to repayment. The empowering legislation in question, or other legislation, might remove the taxpayer’s common law right to repayment. That would depend on the construction of the Act or Acts in question.

In the present case, if the demands for excise duty were unlawful, the payer would, in my judgment, have a prima facie common law right to repayment.

I would not construe s 9(4) as removing that common law right. First, the common law right is not expressly removed. Second, s 9(4) does not purport to constitute a comprehensive statutory scheme for recovery of excise duty paid but not due. If duty were demanded and paid on oil that did not correspond to the description of ‘hydrocarbon oil’ in ss 1 and 2, s 9(4) would not enable recovery to be claimed. The common law claim would be the appropriate means of redress. If prospective relief under s 9(1) had been granted but, unlawfully, duty had none the less been demanded and, perforce, paid, s 9(4) would not apply. The common law claim for restitution would be the means of redress. Third, s 9(4) assumes, implicitly, that the excise duty has been paid pursuant to a lawful demand. It is expressed to deal with a situation in which prospective relief could have been given under s 9(1) but, for some reason or other, has not been given. Prima facie, if prospective relief has not been given under s 9(1), duty will have been properly demanded under s 6.

For these reasons, if British Steel has an arguable case that the demands for payment of excise duty were unlawful demands, I would not be willing to strike out its action on the ground that s 9(4) had removed the common law right of recovery.”

Saville LJ agreed with the Vice-Chancellor. Millett LJ also concurred in the result, albeit he considered that the only concession which the Commissioners had made was that a refusal of relief in circumstances where relief should have been granted would amount to an unlawful demand for payment. In the course of his judgment, Millett LJ said this (at p.382a-d):

“What the appellants have done is to seek to obtain retrospective relief by bringing private law proceedings in restitution to recover duty unlawfully demanded of them by a public authority. They can do this if (i) the demand for payment of the duty was unlawful and (ii) the private law remedy is not excluded by the statutory regime: see [Woolwich]. They have no difficulty with the second of these requirements: the statutory regime established by s 9(1) and (4) is not comprehensive; it is limited to persons who possessed the necessary approval at the relevant time, and the appellants did not. But while this enables the appellants to satisfy the second requirement, it creates an insuperable obstacle in the shape of the first. The commissioners’ demand for duty was not unlawful: they were authorised to demand the duty by the combined effect of s 6 of the 1979 Act and s 43(1) of the Customs and Excise Management Act 1979. Section 9(1) of the former Act authorised them to permit the release of oil from bond to an approved person, but they had no power to permit its release to the appellants, even if they were intending to put it to an intended use, unless they could show that they had been approved.”

This case, which consisted of conjoined claims by the claimant bank against four local authorities, concerned the (now notorious) interest rate ‘swap’ transactions entered into by local authorities. Following the decision of the House of Lords in Hazell v. Hammersmith and Fulham LBC [1992] AC 1 (“Hazell”) that such transactions were ultra vires local authorities, the bank commenced proceedings against four local authorities claiming restitution of the sums which it had paid them. Some of the payments had been made outside the primary six-year limitation period, and in respect of those payments a preliminary issue was ordered as to whether the bank’s claim that such payments had been made by it in the mistaken belief that they were being made pursuant to a binding contract disclosed a cause of action for mistake of law; and, if so, whether the mistake was one in respect of which the bank could rely on section 32(1)(c), so that the period of limitation had not begun to run until the bank had discovered the mistake or could with reasonable diligence have discovered it.

The judge at first instance concluded that on the authorities as they then stood he was bound to conclude that money paid under a mistake of law was not recoverable. He accordingly declined to address the preliminary issue. Leave was given for consolidated appeals by the bank direct to the House of Lords. By a majority (Lord Goff, Lord Hoffmann and Lord Hope of Craighead; Lord Browne-Wilkinson and Lord Lloyd of Berwick dissenting) the House of Lords allowed the bank’s appeals.

Lord Browne-Wilkinson and Lord Lloyd dissented on the single ground that that when the payments in question were made the bank was not labouring under any mistake of law. As Lord Browne-Wilkinson put it (at p.357G-H):

“Were it not for one matter, I would be in full agreement with [Lord Goff’s] views. But unfortunately he and the majority of your Lordships take the view that when established law is changed by a subsequent decision of the courts, money rightly paid in accordance with old established law is recoverable as having been paid under a mistake of law. I take the view that the moneys are not recoverable since, at the time of payment, the payer was not labouring under any mistake.”

As to Hazell, Lord Browne-Wilkinson said this (at p.358B):

“My view …. is that although the decision in Hazell is retrospective in its effect, retrospection cannot falsify history: if at the date of each payment it was settled law that local authorities had capacity to enter into swap contracts, the bank were not labouring under any mistake of law at that date. The subsequent decision in Hazell could not create a mistake where no mistake existed at the time.”

Lord Browne-Wilkinson accordingly concluded (at p.362F-G) that:

“…. if, at the date of payment, the law was settled by clear judicial authority then a payment in accordance with such law was not made under a mistake of law even if the law has subsequently been changed by later judicial decision.”

Lord Browne-Wilkinson concluded his speech as follows (at p.364D-H):

“My Lords, I agree with the views of the Law Commission and would therefore have held that Kleinworts would not be entitled to recover on the grounds of mistake of law if at the time of payment Kleinworts were, or if they had sought advice would have been, advised by all lawyers skilled in the field that the swaps agreements were valid.

My Lords, in these circumstances I find myself in a quandary. I am convinced that the law should be changed so as to permit monies paid under a mistake of law to be recovered. I also accept, for the reasons given by my noble and learned friend Lord Goff, that the relevant limitation period applicable to such a claim would be that laid down by section 32(1)(c) of the Limitation Act 1980, i.e. six years from the date on which the mistake was, or could with reasonable diligence have been, discovered. The majority of your Lordships consider that such claim will arise when the law (whether settled by existing authority or by common consensus) is changed by a later decision of the courts. The consequence of this House in its judicial capacity introducing such a fundamental change would be as follows. On every occasion in which a higher court changed the law by judicial decision, all those who had made payments on the basis that the old law was correct (however long ago such payments were made) would have six years in which to bring a claim to recover money paid under a mistake of law. All your Lordships accept that this position cannot be cured save by primary legislation altering the relevant limitation period. In the circumstances, I believe that it would be quite wrong for your Lordships to change the law so as to make money paid under a mistake of law recoverable since to do so would leave this gaping omission in the law. In my judgment the correct course would be for the House to indicate that an alteration in the law is desirable but leave it to the Law Commission and Parliament to produce a satisfactory statutory change in the law which, at one and the same time, both introduces the new cause of action and also properly regulates the limitation period applicable to it.

I would dismiss these appeals.”

Lord Lloyd agreed with the majority that if there was a mistake of law on which the bank could rely, it could not have discovered that mistake until the House of Lords gave judgment in Hazell; and that by virtue of section 32(1)(c) time would not begin to run until then. However, like Lord Browne-Wilkinson, he concluded that there had been no such mistake.

I turn next to Lord Goff’s speech, which Lord Hoffmann described at the outset of his own speech as one of the most distinguished of Lord Goff’s contributions to the development of the law of restitution.

Lord Goff identified the issues for decision as follows (at p.367B-D):

“I propose to consider the issues in the following order. I shall first consider Issue (1) as ordered by Langley J., which raises the question whether the rule precluding recovery of money paid under a mistake of law should remain part of English law. As part of that issue [(1)] shall also consider whether, if the answer to that question is ‘No’, there should be an exception to recovery on the ground of mistake of law (A) in cases where the money has been paid under a settled understanding of the law which has subsequently been changed by judicial decision, or (B) in cases where the money has been the subject of an honest receipt by the defendant. I shall refer to these two issues as Issue (1A) and Issue (1B) respectively. I shall then consider the issue concerned with the impact upon recovery of the fact that all the interest rate swap transactions in question were fully performed. I shall refer to that issue as Issue (2). Finally I shall turn to consider the second issue as ordered by Langley J. which raises the question whether, on the true construction of section 32(1)(c) of the Act of 1980, the subsection applies to mistakes of law. That I shall refer to as Issue (3).

Lord Goff then set out Issue (1) in his list of issues in the following terms:

“Issue (1) Whether the present rule, under which in general money is not recoverable in restitution on the ground that it was paid under a mistake of law, should be maintained as part of English law.”

Addressing that issue, Lord Goff began by tracing the history of what he called “the mistake of law rule”. He then reviewed the lengthy catalogue of academic and judicial criticism of the mistake of law rule. In the next section of his speech, headed ‘Rejection of the mistake of law rule in the common law world’, Lord Goff drew attention to the fact that the mistake of law rule had already been abrogated in a number of common law jurisdictions, either by legislation or by judicial decision. In this context, he drew particular attention to the dissenting judgment of Dickson J in the Canadian case of Hydro Electric, which was subsequently adopted in Air Canada. Turning to jurisdictions which apply a system based on the civil law, Lord Goff cited the South African case of Willis Faber Enthoven (Pty.) Ltd v. Receiver of Revenue 1992 (4) SA 202 (“Willis Faber”) as an example of a case in which the mistake of law rule was rejected.

After noting that the Law Commission had recommended that the mistake of law rule be abrogated in this jurisdiction, Lord Goff turned, in a section of his speech headed ‘Comparative law’, to a consideration of the policy adopted in a number of civil law systems in Europe towards the recovery of money paid under a mistake of law. He noted that in a number of European cases (he referred in particular to cases in Germany and France) it had been held that it was unnecessary for the plaintiff to prove that he was mistaken; and that such cases were concerned with the recovery of taxes. He continued (at p.375A):

“In such cases, as was recently held by this House in [Woolwich], English law too dispenses with any requirement that the money should have been paid under a mistake and indeed goes further, allowing recovery even if the taxpayer pays in the belief that the money is not due. Here is food for thought for both German and English comparative lawyers. In this connection I wish to add in passing that, in [Royal Insurance] Mason C.J. stated that in Woolwich the House of Lords was "unwilling to acknowledge that causative mistake of law is a basis of recovery"; but, with respect, no question of recovery on the ground of a mistake of law arose in that case, because the Woolwich Building Society throughout asserted that the money was not due.”

In the next section of his speech, which is headed ‘Conclusion on the first issue’, Lord Goff said this (at pp.375E-376C):

“For all these reasons, I am satisfied that your Lordships should, if you decide to consider the point yourselves rather than leave it to the Law Commission, hold that the mistake of law rule no longer forms part of English law. I am very conscious that the Law Commission has recommended legislation. But the principal reasons given for this were that it might be some time before the matter came before the House, and that one of the dissentients in the Woolwich case (Lord Keith of Kinkel) had expressed the opinion that the mistake of law rule was too deeply embedded to be uprooted judicially …. Of these two reasons, the former has not proved to be justified, and the latter does not trouble your Lordships because a more robust view of judicial development of the law is, I understand, taken by all members of the Appellate Committee hearing the present appeals. Moreover, especially in the light of developments in other major common law jurisdictions, not to mention South Africa and Scotland, the case for abrogation is now so strong that the respondents in these appeals have not argued for its retention. In these circumstances I can see no good reason for postponing the matter for legislation, especially when we do not know whether or, if so, when Parliament may legislate. Finally I believe that it would, in all the circumstances, be unjust to deprive the Appellant, Kleinwort Benson, of the benefit of the decision of the House on this point. I would therefore conclude on Issue (1) that the mistake of law rule should no longer be maintained as part of English law, and that English law should now recognise that there is 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.”

Lord Goff then turned to what he described as “a central question in these appeals”, as to whether payments made on the basis of a settled understanding of the law which is later changed by judicial decision should be recoverable on the ground of mistake of law. At p.376A-C he said this:

“This [question] relates to the fact that the payments of which recovery is sought in these cases were made under contracts which at the time were understood by all concerned to be valid and binding, so that the payments themselves were believed to be lawfully due under those contracts. This misunderstanding was, of course, removed by the decision of this House in Hazell …. that the contracts were beyond the powers of the local authorities involved and so void. The argument now advanced by the local authorities is that payments so made on the basis of a settled understanding of the law which is later changed by a judicial decision should not be recoverable on the ground of mistake of law.”

After referring to the declaratory theory of judicial decisions (that is to say, the theory that judicial decisions do not themselves constitute the law but are merely evidence of the law), Lord Goff turned (at p379F) to the question whether the bank was labouring under a mistake of law when it paid money to the local authorities under interest swap agreements which it believed to be valid. He began his consideration of this question by saying this (at p.379F-H):

“It is in the light of the foregoing that I have to ask myself whether the Law Commission's ‘settled understanding of the law’ proposal forms part of the common law. This, as I understand the position, requires that I should consider whether parties in the position of [the bank] were mistaken when they paid money to local authorities under interest swap agreements which they, like others, understood to be valid but have later been held to be void. To me, it is plain that the money was indeed paid over under a mistake, the mistake being a mistake of law. The payer believed, when he paid the money, that he was bound in law to pay it. He is now told that, on the law as held to be applicable at the date of the payment, he was not bound to pay it. Plainly, therefore, he paid the money under a mistake of law, and accordingly, subject to any applicable defences, he is entitled to recover it.”

At pp.381B-384D Lord Goff addressed the question whether it was appropriate for the House of Lords to recognise a limit to recovery on the lines of the Law Commission’s ‘settled understanding of the law’ proposal. In the course of the argument, both before the judge and in this court, this section of Lord Goff’s speech has been subjected by both Mr Glick and by Mr Lawrence Rabinowitz QC (for DMG) to the most minute, not to say microscopic, analysis. I must therefore quote it in full:

“The question then arises whether, having regard to the fact that the right to recover money paid under a mistake of law is only now being recognised for the first time, it would be appropriate for your Lordships' House so to develop the law on the lines of the Law Commission's proposed reform as a corollary to the newly developed right of recovery. I can see no good reason why your Lordships' House should take a step which, as I see it, is inconsistent with the declaratory theory of judicial decision as applied in our legal system, under which the law as declared by the judge is the law applicable not only at the date of the decision but at the date of the events which are the subject of the case before him, and of the events of other cases in pari materia which may thereafter come before the courts. I recognise, of course, that the situation may be different where the law is subject to legislative change. That is because legislation takes effect from the moment when it becomes law, and is only retrospective in its effect to the extent that this is provided for in the legislative instrument. Moreover even where it is retrospective, it has the effect that as from the date of the legislation a new legal provision will apply retrospectively in place of that previously applicable. It follows that retrospective legislative change in the law does not necessarily have the effect that a previous payment was, as a result of the change in the law, made under a mistake of law at the time of payment. (I note in parenthesis that in [Royal Insurance] the High Court of Australia was divided on the question whether the retrospective legislation there under consideration had the effect that a previous payment had been made under a mistake of law.) As I have already pointed out, this is not the position in the case of a judicial development of the law. But, for my part, I cannot see why judicial development of the law should, in this respect, be placed on the same footing as legislative change. In this connection, it should not be forgotten that legislation which has an impact on previous transactions can be so drafted as to prevent unjust consequences flowing from it. That option is not, of course, open in the case of judicial decisions.

At this point it is, in my opinion, appropriate to draw a distinction between, on the one hand, payments of taxes and other similar charges and, on the other hand, payments made under ordinary private transactions. The former category of cases was considered by your Lordships' House in [Woolwich], in which it was held that at common law taxes exacted ultra vires were recoverable as of right, without the need to invoke a mistake of law by the payer. Moreover reference was made, in the course of the hearing, to the various statutory provisions (usefully summarised in the Law Commission's Consultation Paper (Law Com. No. 120) at pp. 74-84) which regulate the repayment of overpaid tax. For present purposes it is of interest that, in the case of some taxes (including income and corporation tax), no relief is given ‘in respect of an error or mistake as to the basis on which the liability . . . ought to have been computed where the return was in fact made on the basis of or in accordance with the practice generally prevailing at the time when the return was made’: see the proviso to section 33(2) of the Taxes Management Act 1970.

Two observations may be made about the present situation. (I of course have it in mind that this is the subject of proposals for legislative reform contained in the Law Commission's Report (Law Com. No. 227), but your Lordships are concerned with the law as it stands at present.) The first observation is that, in our law of restitution, we now find two separate and distinct regimes in respect of the repayment of money paid under a mistake of law. These are (1) cases concerned with repayment of taxes and other similar charges which, when exacted ultra vires, are recoverable as of right at common law on the principle in Woolwich, and otherwise are the subject of statutory regimes regulating recovery; and (2) other cases, which may broadly be described as concerned with repayment of money paid under private transactions, and which are governed by the common law. The second observation is that, in cases concerned with overpaid taxes, a case can be made in favour of a principle that payments made in accordance with a prevailing practice, or indeed under a settled understanding of the law, should be irrecoverable. If such a situation should arise with regard to overpayment of tax, it is possible that a large number of taxpayers may be affected; there is an element of public interest which may militate against repayment of tax paid in such circumstances; and, since ex hypothesi all citizens will have been treated alike, exclusion of recovery on public policy grounds may be more readily justifiable.

In the present case, however, we are concerned with payments made under private law transactions. It so happens that a significant number of payments were in fact made under interest rate swap agreements with local authorities before it was appreciated that they were void; but the number is by no means as great as might conceivably occur in the case of taxes overpaid in accordance with a prevailing practice, or under a settled understanding of the law. Moreover the element of public interest is lacking. In cases such as these I find it difficult to understand why the payer should not be entitled to recover the money paid by him under a mistake of law, even if everybody concerned thought at the time that interest rate swap agreements with local authorities were valid.

Of course, I recognise that the law of restitution must embody specific defences which are concerned to protect the stability of closed transactions. The defence of change of position is one such defence; the defences of compromise, and settlement of an honest claim (the scope of which is a matter of debate), are others. It is possible that others may be developed from judicial decisions in the future. But the proposed ‘settled understanding of the law’ defence is not, overtly, such a defence. It is based on the theory that a payment made on that basis is not made under a mistake at all. Once that reasoning is seen not to be correct, the basis for the proposed defence is, at least in cases such as the present, undermined.

I wish further to add that the proposal that a payment made under a settled understanding of the law, later proved to be erroneous, should be irrecoverable, does not depend upon the lapse of any period of time after the date of the payment in question. Take the present case. Suppose that, shortly after the payment by Kleinwort Benson to a local authority of the first sum due under an interest rate swap contract, it transpires that the contract was ultra vires the local authority and so void, and that the sum so paid was therefore not due. Let it also be assumed that there have been relatively few transactions of this kind with local authorities, but enough for it to be said that that sum was paid on the basis of a settled understanding that the money was lawfully due. I find it difficult to accept that, for that reason alone, the payment would be irrecoverable as having been paid under a mistake of law. Indeed it is an remarkable feature of the proposed principle that, the longer ago the payment was made, the less likely is it to have been made under a settled understanding of the law. An appropriately drawn limitation statute would surely produce a more just result. This is a point to which I will return later in this opinion.

For these reasons alone, therefore, I would reject the argument of the local authorities on this point. But I wish to refer also to the insecure foundation upon which the proposed provision is based, arising from the difficulty of defining the circumstances in which it should apply. The New Zealand statutory provision (section 94A(2) of the Judicature Act 1908) excludes relief in respect of

“any payment made at a time when the law requires or allows, or is commonly understood to require or allow, the payment to be made or enforced, by reason only that the law is subsequently changed or shown not to have been as it was commonly understood to be at the time of payment”.

The Western Australian statutory provision (section 23(2) of the Law Reform (Property, Perpetuities and Succession) Act 1962) takes the same form. It is recognised, however, that the concept of “common understanding” of the law has given rise to difficulty …. and, on this score at least, the statutory provision has been the subject of criticism. In this country the Law Commission has attempted to improve on the New Zealand statute by referring not to a common understanding of the law, but instead to a ‘settled view of the law’ which has been departed from by a subsequent judicial decision. However, as [counsel for the bank] pointed out in argument, there could be much scope for argument over what constituted a settled view of the law. Take the case of interest rate swap agreements. These were assumed by the banks (and indeed by others concerned) to be within the powers of local authorities; but this assumption appears to have been based on practical grounds, rather than on advice about the legal position. Nor do the local authorities appear to have addressed the legal position until after the matter was raised by the Audit Commission in 1987, over five years after agreements of this kind began to be entered into by local authorities. Had the point arisen under a statute in the form recommended by the Law Commission, it would have been necessary to consider whether the above circumstances gave rise to a ‘settled view of the law’. It is only necessary to pose the question to realise how difficult it would have been to answer it in the present case, and very possibly in the case of other payments made under private transactions. For this reason alone it comes as no surprise that the Law Reform Commission of British Columbia decided …. not to recommend the adoption of any such provision in that Province, though they also considered …. that the New Zealand statutory provision ‘goes far beyond what is required’. The Law Reform Committee of South Australia …. likewise did not recommend the adoption of any such provision, though three years later the Law Reform Commission of New South Wales …. proposed the legislative adoption of a similar but not identical provision. In Scotland, …. the Scottish Law Commission at first recommended its adoption, but later resiled from that recommendation. …. This division of opinion does not encourage statutory adoption of a provision in these or comparable terms, still less its recognition as part of the common law of this country.”

In the following two sections of his speech, Lord Goff turned to the question of ‘honest receipt’ (issue (1B) in his list of issues) and to the significance of the fact that the transactions in issue were completed transactions (issue (2) in his list of issues). Since neither of these issues is material for present purposes I can take up Lord Goff’s speech at p.387G, where he turned to the question whether section 32(1)(c) applies to mistakes of law (Issue (3) on his list of issues). He concluded that section 32(1)(c) does so apply. At p.389A he said this:

“I recognise that the effect of section 32(1)(c) is that the cause of action in a case such as the present may be extended for an indefinite period of time. I realise that this consequence may not have been fully appreciated at the time when this provision was enacted, and further that the recognition of the right at common law to recover money on the ground that it was paid under a mistake of law may call for legislative reform to provide for some time limit to the right of recovery in such cases. The Law Commission may think it desirable, as a result of the decision in the present case, to give consideration to this question indeed they may think it wise to do so as a matter of some urgency. If they do so, they may find it helpful to have regard to the position under other systems of law, notably Scottish and German law. On the section as it stands, however, I can see no answer to the submission of [the bank] that their claims in the present case, founded upon a mistake of law, fall within the subsection.”

Lord Goff summarised his conclusions on the various issues as follows (at p.389D-G):

“In the result, I would answer the questions posed for your Lordships under the various Issues as follows:

Issue (1): The present rule, under which in general money is not recoverable in restitution on the ground that it has been paid under a mistake of law, should no longer be maintained as part of English law, from which it follows that the facts pleaded by Kleinwort Benson in each action disclose a cause of action in mistake.

Issue (1A):  There is no principle of English law that payments made under a settled understanding of the law which is subsequently departed from by judicial decision shall not be recoverable in restitution on the ground of mistake of law.

Issue (1B): It is no defence to a claim in English law for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to retain the money or property.

Issue (2):.There is no principle of English law that money paid under a void contract is not recoverable on the ground of mistake of law because the contract was fully performed.

Issue (3): Section 32(1)(c) of the Limitation Act 1980 applies in the case of an action for the recovery of money paid under a mistake of law.”

Lord Hoffmann agreed with Lord Goff, and confined his speech to a consideration of the one issue which divided their Lordships, viz. whether the bank made the payments in question under a mistake of law. In the course of his speech he expressed the clear view that the question whether the law should recognise a ‘settled law defence’ (he referred to is as a ‘settled view rule’) was a question for Parliament. He concluded his speech by saying this (at p.401F-H):

“I should say in conclusion that your Lordships' decision leaves open what may be difficult evidential questions over whether a person making a payment has made a mistake or not. There may be cases in which banks which have entered into certain kinds of transactions prefer not to raise the question of whether they involve any legal risk. They may hope that if nothing is said, their counter-parties will honour their obligations and all will be well, whereas any suggestion of a legal risk attaching to the instruments they hold might affect their credit ratings. There is room for a spectrum of states of mind between genuine belief in validity, founding a claim based on mistake, and a clear acceptance of the risk that they are not. But these questions are not presently before your Lordships.”

Finally, so far as Kleinwort Benson is concerned, I turn to the speech of Lord Hope. At p.405C Lord Hope agreed with Lord Goff that a decision as to whether the mistake of law rule should be abrogated should not be left to Parliament. At pp.407H-408G, under the heading ‘Was there a mistake?’, Lord Hope said this:

“Subject to any defences that may arise from the circumstances, a claim for restitution of money paid under a mistake raises three questions: (1) was there a mistake? (2) did the mistake cause the payment? and (3) did the payee have a right to receive the sum which was paid to him?

The first question arises because the mistake provides the cause of action for recovery of the money had and received by the payee. Unless the payer can prove that he acted under a mistake, he cannot maintain an action for money had and received on this ground. The second question arises because it will not be enough for the payer to prove that he made a mistake. He must prove that he would not have made the payment had he known of his mistake at the time when it was made. If the payer would have made the payment even if he had known of his mistake, the sum paid is not recoverable on the ground of that mistake. The third question arises because the payee cannot be said to have been unjustly enriched if he was entitled to receive the sum paid to him. The payer may have been mistaken as to the grounds on which the sum was due to the payee, but his mistake will not provide a ground for its recovery if the payee can show that he was entitled to it on some other ground.

In the present case the second and third questions do not appear to present any difficulty. But the first question raises an issue of very real importance. The answer which is given to it will have significant implications for the future development of the law of restitution on the ground of unjust enrichment.

In my opinion the proper starting point for an examination of this issue is the principle on which the claim for restitution of these payments is founded, which is that of unjust enrichment. The essence of this principle is that it is unjust for a person to retain a benefit which he has received at the expense of another, without any legal ground to justify its retention, which that other person did not intend him to receive. This has been the basis for the law of unjust enrichment as it has developed both in the civilian systems and in Scotland, which has a mixed system-partly civilian and partly common law. On the whole, now that the common law systems see their law of restitution as being based upon this principle, one would expect them to apply it, broadly speaking, in the same way and to reach results which, broadly speaking, were similar ….

What, then, is the function of mistake in the field of restitution on the ground of unjust enrichment? The answer, one may say, is that its function is to show that the benefit which has been received was an unintended benefit. A declaration of intention to confer the benefit, even if unenforceable, will be enough to justify the retention of the enrichment. A mistake, on the other hand, will be enough to justify the restitutionary remedy, on the ground that a benefit which cannot be legally justified should not be retained where it was a mistaken and thus unintended benefit.”

With reference to the doctrine of unjust enrichment, Lord Hope said (at p.409B):

“It is the mistake by the payer which, as in the case of failure of consideration and compulsion, renders the enrichment of the payee unjust.”

He continued:

“The common law accepts that the payee is enriched where the sum was not due to be paid to him, but it requires the payer to show that this was unjust. Whereas in civilian systems proof of knowledge that there was no legal obligation to pay is a defence which may be invoked by the payee, under the common law it is for the payer to show that he paid under a mistake. My impression is that the common law tends to place more emphasis on the need for proof of a mistake. But the underlying principle in both systems is that of unjust enrichment. The purpose of the principle is to provide a remedy for recovery of the enrichment where no legal ground exists to justify its retention. But does it matter whether the mistake is one of fact or one of law?”

Lord Hope observed (at p.409H) that there is no essential difference as between fact and law in regard to the payer’s state of mind. He continued:

“This may vary from one of complete ignorance to a state of ample knowledge but a misapplication of what is known to the facts. The mistake may have been caused by a failure to take advice, by omitting to examine the available information or by misunderstanding the information which has been obtained. Or it may have been due to a failure to predict correctly how the court would determine issues which were unresolved at the time of the payment, or even to foresee that there was an issue which would have to be resolved by the court. As Mason C.J. said in [David Securities Pty Ltd v. Commonwealth Bank of Australia (1992) 175 CLR 35 (“David Securities”)] at p. 374, the concept of mistake includes cases of sheer ignorance as well as of positive but incorrect belief.

Cases where the payer was aware that there was an issue of law which was relevant but, being in doubt as to what the law was, paid without waiting to resolve that doubt may be left on one side. A state of doubt is different from that of mistake. A person who pays when in doubt takes the risk that he may be wrong and that is so whether the issue is one of fact or one of law. As for mistake, this may arise where there is no suggestion that the law has changed since the payment was made. If it can be demonstrated by reference to statute or to case law that the law was overlooked or was applied wrongly, the position will be the same as that where the mistake was one as to the state of the facts. It is very unusual for a statute to provide for the law to be changed retrospectively, but this is not unknown: see the War Damage Act 1965. If the law is changed retrospectively by statute, so that a payment which was legally due when it was paid has now become undue, the correct analysis will be that there was no mistake at the time when it was made. The enrichment will have been due to the fact that the law was changed retrospectively by the statute.”

Lord Hope went on to consider the position where the fact that the payment was not legally due at the time it was made was only revealed later by subsequent case law: i.e. where the payment was made on the understanding that the law on the point was settled and that understanding was shown by subsequent case law to have been wrong. He concluded (at p.411C-D) that the critical question in this respect was:

“…. whether the payer would have made the payment if he had known what he is now told was the law.”

As to the effect of the decision in Hazell, Lord Hope said (at p.411G) that if it were necessary to decide the point, he would conclude that it would not be right to say that the decision changed the law; rather, it clarified a point which had been overlooked and which was in need of determination by the court. He continued:

“But the situation seems to me to be no different in principle from one where the facts are shown, as a result of inquiries which at the time of payment were overlooked or not thought to be necessary, to have been different from what they had been thought to be at the time of the payment by the payer. Prima facie the bank is entitled to restitution on the ground of mistake.”

In the next section of his speech, Lord Hope addressed the question whether there should be defences in mistake of law cases which were not available in mistake cases generally. In this context he referred once again (at p.412C) to the requirement that the claimant show that he acted under a mistake which caused him to pay a sum which the payee was not legally entitled to receive, saying that “a payment made in the knowledge that there was a ground to contest liability will be irrecoverable”. At p.414E he turned to the ‘settled law defence’ favoured by the Law Commission, saying this:

“The ‘settled law’ defence is the one favoured by the Law Commission, after consultation, in its Report…. They have recommended that a restitutionary claim in respect of any payment, service or benefit that has been made, rendered or conferred under a mistake of law should not be permitted merely because it was done in accordance with a settled view of the law at the time, which was later departed from by a subsequent judicial decision. ….

One of the objections to the ‘settled law’ defence is that it is incapable of precise definition. Each case would have to be decided on the evidence, that would create uncertainty, and it is difficult to predict the absurdities which may result. One point however does appear to emerge from the discussions so far. This is that a payment made on a settled view of the law is more likely to be excusable, and thus to be one where restitution would more obviously be justified, than a payment made as a result of one man's mistake or ignorance. Yet a mistake of law which only the payer himself had made would not be caught by the defence. As [counsel for the bank] said, the worse the legal advice the more likely the payer could show that the defence was not applicable. But I do not need to elaborate on this point. The valuable work done by the Scottish Law Commission has shown a need for caution which I consider to be entirely justified. I would not favour the introduction of such a defence judicially. Nor do I think that it would be right to apply it to this case, even if its recognition were to be thought to be desirable on grounds of public policy. The fact that restitution has already been given in many of the interest swap cases, albeit on the ground of failure of consideration, would create a situation which I would find unacceptable. Unless the defence can satisfy the test of denying restitution in all cases on the same facts it ought not, in fairness to all parties, to be applied in any of them.”

At p.416H Lord Hope turned to the question whether the bank’s action was an action for relief from the consequences of a mistake, within the meaning of section 32(1)(c). He concluded that it was, since there was nothing in the wording of the provision to restrict its application to a mistake of fact. He continued (at p.417G):

“The objection may be made that time may run on for a very long time before a mistake of law could have been discovered with reasonable diligence, especially where a judicial decision is needed to establish the mistake. It may also be said that in some cases a mistake of law may have affected a very large number of transactions, and that the potential for uncertainty is very great. But I do not think that any concerns which may exist on this ground provide a sound reason for declining to give effect to the section according to its terms. The defence of change of position will be available, and difficulties of proof are likely to increase with the passage of time. I think that the risk of widespread injustice remains to be demonstrated. If the risk is too great that is a matter for the legislature. …. It may be that even in mistake of fact cases where restitution is available under English law some further restriction of the circumstances where indefinite postponement is available may be appropriate. But that is a matter which is best considered by the Law Commission.”

In Nurdin the plaintiff made overpayments of rent, including one payment which it made in May 1997 in reliance on advice that the payment would be recoverable following litigation establishing that it was an overpayment. The court held that the payments in question were indeed overpayments. The plaintiff then sought repayment of the sums overpaid (including the payment made in May 1997), on the basis that they were made under a mistake of fact, and were therefore recoverable; alternatively, that even if they were made under a mistake of law, it would be right to order repayment. The defendant landlord conceded that the payments other than the May 1997 payment were repayable, but it contended that the May 1997 payment had been made not as a result of a mistake as to whether the plaintiff was liable to make it, but because of a mistake as to its right to recover it.

The relevance of Nurdin for present purposes lies in Neuberger J’s analysis of the circumstances in which it can be said that a payment has been made under a mistake (whether of fact or law). Neuberger J held that all the overpayments were recoverable, including the payment made in May 1997, as having been made under a mistake of fact. At p.1271A Neuberger J turned to the submission of Mr Nugee QC (for the defendant landlord) that the plaintiff’s case based on mistake was logically unsustainable since if the May 1997 payment were to be held to be recoverable, there would, by definition, have been no mistake; and if it were held not to be recoverable, that would be the end of the matter and no question of mistake would arise. In support of this submission, Mr Nugee had relied on Lord Hope’s observation in Kleinwort Benson to the effect that a person who pays when in doubt takes the risk that he may be wrong (quoted in paragraph 100 above) and on his observation that it is the mistake by the payer which renders the enrichment of the payee unjust (quoted in paragraph 97 above). Neuberger J considered that these observations of Lord Hope were of little assistance to the defendant landlord since, among other things, the decision of the House of Lords in Kleinwort Benson was concerned with a case where a payment had been made under a mistake as to liability and Lord Hope’s observations had to be read in that context.

Neuberger J then turned (at p.1271G) to a submission by Mr Nugee based on the distinction drawn by Lord Goff in Woolwich between a case in which money is paid under a mistake of law and a case where the payer makes the payment notwithstanding that he is aware that he can contest his liability in proceedings. At p.1272A Neuberger J said this:

“In my judgment, Nurdin’s argument on this point is correct. First, as a matter of principle, it seems to me that the correct question for the court to ask itself when considering whether money was paid under a mistake of law (and is therefore prima facie recoverable) would at least normally be whether the payment would have occurred if the payer had not made the alleged mistake. It is hard to see a good reason, either in principle or in practice, for holding that a person should be entitled to recover a payment made under a mistake, if that mistake relates to the question of his liability, but that he should not be entitled to recover the payment if the mistake was of some other nature. As I see it, if there was a mistake, and particularly if it related directly and closely to the payment and to the relationship between payer and payee, and, above all, if the mistake had not been made there would have been no payment, then the payment in question is prima facie recoverable. I would hesitate, particularly so soon after the decision in [Kleinwort Benson], before trying to lay down any general principle, but it does seem to me clear that in order to found a claim for repayment of money paid under a mistake of law, it is necessary for the payer to establish not only that the mistake was made but also that, but for the mistake, he would not have paid the money. It may be that the payer must go further and establish, for instance, that the mistake was directly connected to the overpayment and/or was connected to the relationship between payer and payee. I doubt whether such further requirements, if they exist, would take matters any further in most cases. However, if such further requirements do exist, I believe that they are satisfied here in relation to the May 1997 overpayment …”

At p.1273G the judge turned to the question of causation, saying this:

“It may be said that the mistake did not “cause” the payment, and it is fair to say that the concept of causation is one of which the courts and writers have had much to say in many areas of law. As I have mentioned already, I consider that the “but for” test, (possibly coupled with a requirement for a close and direct connection between the mistake and the payment and/or a requirement that the mistake impinges on the relationship between payer and payee), is sufficient, in my judgment, to found a claim based on mistake. This seems to me to receive some support from the words used in earlier authorities; “material” and “vital”, to describe the necessary quality of the mistake.”

As noted earlier, the only relevance of Eagerpath for present purposes lies in Brooke LJ’s apparent assumption that a taxpayer who has made a payment of tax under a mistake of law has a cause of action at common law for relief from the consequences of his mistake.

In Eagerpath, the claimant company’s appeal against a corporation tax assessment for the accounting period to 30 April 1987 was settled by agreement under TMA section 54. In 1990 the claimant ceased trading. In 1992 it made a claim for relief under TMA section 33 in relation to the accounting period in question on the basis that by mistake interest charges had been treated as trading expenses rather than as a charge on income. The revenue rejected the claim. The Special Commissioners dismissed the claimant’s appeal, holding that relief on the ground of mistake was precluded by reason of the settlement under section 54. On the claimant’s appeal to the High Court, the revenue argued that the High Court had no jurisdiction since, by virtue of section 33(4), there was no appeal from a decision of the Special Commissioners save ‘on a point of law arising in connection with the computation of profits’. Arden J dismissed the claimant’s appeal, holding that section 33(4) could not be circumvented by submitting that the Special Commissioners had failed to deal with the appeal properly; that could only be done, if at all, by judicial review. She further held that the question whether the treatment of interest was included in the section 54 agreement was not a point of law arising in connection with the computation of profits.

The Court of Appeal upheld Arden J’s decision. The leading judgment was given by Robert Walker LJ, but the relevance of the case for present purposes lies in the concurring judgment of Brooke LJ. In the course of his judgment, Brooke LJ said this with reference to TMA section 33:

“33.

The continued existence of a statutory scheme of this kind, founded on executive and legislative benevolence, is strangely inconsistent with modern rights-based law and the ability of the High Court to correct all manner of errors of law, whether or not Parliament has created a statutory avenue to that court by appeal or case stated. Given that the House of Lords has now recognised that the citizen has a right to recover money paid under a mistake of law ([Kleinwort Benson]) it is odd to find a statutory scheme lingering on which denies that right after six years even when the citizen was unaware of the mistake and could not have discovered it with reasonable diligence (see Lord Goff of Chieveley in [Kleinwort Benson] at p 389A-C on the effect of section 32(1)(c) of the [1980 Act] in these cases).

34.

In his ground-breaking speech in [Woolwich] Lord Goff of Chieveley spoke at p 204 of the way in which the recognition by the House of Lords of a right of recovery of wrongly paid taxes at common law (at that time limited to payments made in response to ultra vires demands) afforded an immediate opportunity for the authorities concerned to reformulate, in collaboration with the Law Commission, the appropriate limits to recovery, on a coherent system of principles suitable for modern society.

35.

The Law Commission published its proposals in response to Lord Goff's invitation in its report …. No 227. In its report the Commission was sharply critical …. of certain features of [TMA] section 33. Its preferred solution can be seen in the draft tax clauses set out on pages 202 and 204 of its report. This solution, however, has been rejected by the Government, and section 33 still remains on the statute book very much in its original form.

36.

Since 1994 the need for the reform of section 33 has quickened, for three main reasons. The first is the decision of the House of Lords in [Kleinwort Benson]. The second is the judgment of the European Court of Human Rights in National and Provincial Building Society v United Kingdom [1997] STC 1466. In that case the court at Strasbourg held that restitution proceedings for taxes paid under regulations later declared invalid involved the determination of the applicant's civil rights within the meaning of Article 6(1) of the European Convention of Human Rights. The third is the coming into force of the Human Rights Act 1998 which bars public authorities (an expression which includes the Commissioners of Inland Revenue as well as the courts) from acting in a way which is incompatible with a Convention right (s.6(1)).

37.

In the rights-based culture in which we now live, it is with something resembling the curiosity of an antiquary that I examine the features of [TMA] section 33 that are in issue in the proceedings. Although the scheme bears none of the features of modern rights-based law that are so evident in the Law Commission's draft clauses, this does not necessarily mean that the court can avoid giving effect to them on this occasion. It goes without saying that if Arden J is right, the scheme provides no facility at all for express recourse to the High Court on a point of law of a preliminary kind such as exercised the mind of the Special Commissioner in this case. During the course of argument other examples were given of possible errors of law which did not fall within the rubric of section 33(4), as interpreted by the judge.

38.

On the interpretation of section 33(4), however, I have read the judgment of Robert Walker LJ and I have nothing to add to his reasons for upholding the decision of the judge, with which I agree. This does not mean that an aggrieved taxpayer has no potential right of redress. One of the reasons for the overhaul in the procedures for judicial review was to facilitate access to the supervisory jurisdiction of the High Court in cases where inferior tribunals, such as the Special Commissioners, were said to have made errors of law in relation to which no statutory rights of redress were available. The judges of the Administrative Court now adopt a benevolent approach to the interpretation of the time limits for judicial review applications in cases where the taxpayer was concerned first with exhausting his statutory remedies. There is also, as I have made clear, a private law action available through the ordinary courts, although this seems a less than ideal forum for complicated disputes about tax law.

39.

….

40.

Whatever may the position in the type of case where the only detectable error of law is founded on allegations of irrationality, this should provide no reasonable grounds for inhibition where the error of law complained of is a pure error of law, as it is in the present case which turns on the correct legal interpretation of the settlement reached between Mr Sokol's clients and the Inland Revenue in February 1989.

41.

For these reasons, while I do not anticipate a very long span of future happy life for [TMA] section 33, now that it is well past pensionable age in a new rights-based legal culture, I agree that this appeal should be dismissed.”

Mr Rabinowitz relies on Mallusk as providing direct support for his submission as to the existence of a common law cause of action where an overpayment of tax has been made under a mistake of law.

In Mallusk the first plaintiffs constructed cold storage premises which were rated as from 1 April 1987. Having taken expert advice, they sought to appeal the rating assessment on the ground that the premises ought to have been categorised as industrial premises, and as such to have been treated as having a nil rateable value. The appeal was rejected, and the first plaintiffs accordingly paid the rates demanded. They subsequently joined with other companies in the cold storage business who had also sought to challenge the rating assessment on their premises. They obtained an opinion from senior counsel, but after discussion decided that it was not commercially worthwhile to pursue the matter further. Subsequently, in a different case the Lands Tribunal for Northern Ireland held that cold store premises were to be categorised for rating purposes as industrial premises. The rates paid by the first plaintiffs were refunded, but only as from the date of the decision. The second plaintiffs, who occupied cold storage premises, also received a refund of the rates which they had paid as from the date of the decision.

The plaintiffs brought actions to recover the rates paid prior to that date, relying on Kleinwort Benson. The respondent department accepted that Kleinwort Benson had abrogated the mistake of law rule in cases involving what Lord Goff had described as ‘private transactions’, but contended that it had not abrogated the rule in cases involving repayment of taxes and other similar public charges. It further contended that Woolwich did not apply, since the demand for the rates was not ultra vires.

Coghlan J, in a judgment delivered after the Park J had delivered judgment in the instant case, concluded that a claim for restitution of money paid under a mistake of law was available in respect of sums paid by way of taxes. However, he went on to hold that both actions were statute-barred, on the ground that the limitation period started to run when the plaintiffs received senior counsel’s opinion, since as from that date they were in a state of doubt as to the state of the law, rather than labouring under a mistake of law.

In paragraphs 25 and 26 of his judgment, Coghlan J said this:

“25.

While it is not difficult to appreciate the concern of Lord Goff about the large number of cases that might be affected should the abrogation of the rule against recovery for money paid under a mistake of law apply to public impositions such as taxes, rates etc such an exception would not appear to flow logically from the broad general proposition enunciated at p 375 of his speech that:

“…English law should now recognise that there is 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”.

A large number of tax or ratepayers might be affected in such circumstances but substantial resources are available to the State and, as a matter of principle, it is perhaps difficult to see why the State should benefit from unjust enrichment particularly when the vast majority of tax and ratepayers are unlikely to be substantial businesses or corporations. At p 381 of his speech Lord Goff considered whether their Lordships should develop the law on the lines suggested by the Law Commission as a corollary to the newly developed right of recovery but went on to observe that:

“ But, for my part, I cannot see why judicial development of the law should, in this respect, be placed on the same footing as legislative change. In this connection, it should not be forgotten that legislation which has an impact on previous transactions can be so drafted as to prevent unjust consequences flowing from it. That option is not, of course, open in the case of judicial decisions”.

In my opinion this passage suggests that it was the ‘settled law’ defence about which Lord Goff was speaking at this stage of his speach and in my view neither his speech nor those delivered by any other of their Lordships required an exception to be made specifically for taxes, rates etc. Ultimately, it seems to me that the issues of social and economic policy which underpin the argument that it would be in the public interest to create an exception for overpayments of tax, rates etc are matters which should be properly considered by Parliament and, if appropriate, incorporated into legislation.

26.

I note that, since the hearing of these actions, Park J has given judgment in [the instant case], in the course of which he rejected the argument that Lord Goff was saying in the passage upon which counsel for the department seeks to rely that restitution for money paid under a mistake of law was not available in respect of sums paid by way of taxes. I respectfully agree and adopt the reasoning of Park J.”

Addressing the question whether the payments in question had been made under a mistake of law, Coghlan J said this (in paragraph 38 of his judgment):

“Article 6 of the Rates (Northern Ireland) Order 1977 places the defendant under a duty to make rates for each year in accordance with the provisions of the order and art 18 of the same order places the occupier of the relevant hereditament under a duty to discharge the rates made. The relevant mistake of law in these cases, essentially a mixed question of law and fact, was whether the premises of the plaintiffs ought to have been distinguished as industrial by the commissioner or district valuer in accordance with art 43 and schs 2 and 14. By its judgment dated the 3^rd April 1998 the Lands Tribunal recognised that premises occupied for the purposes for which the plaintiffs occupied their premises should be so distinguished. While both the plaintiffs in these actions appear to have raised the issue whether their premises ought to be distinguished as industrial at an early stage after occupation relying both upon representations made on their own behalf and with the assistance of agents, it does not seem to me that either of them would have entertained any real reason to reject their interpretation of the law put forward on behalf of the defendant until senior counsel’s opinion was furnished to the group of companies. Up until that time, I have reached the view, on the balance of probabilities, that the plaintiffs were making payments on the basis of a mistake of law bearing in mind that such a mistake may result from the failure to take advice, the omission to examine the available information, misunderstanding the information that has been obtained or failing to identify the relevant issues. However, it seems to me that once senior counsel’s opinion had been obtained, despite the fact that it was far from enthusiastic, couching the prospects of success as not ‘great’ and ‘an uphill struggle’, the state of each plaintiff’s mind must have moved from that of ‘mistake’ to one of ‘doubt’. It seems to me that after considering their solicitor’s advice and taking the benefit of senior counsel’s opinion, the agreement by this group of companies reached as a ‘commercial decision’ not to take the risk of further legal proceedings falls within those cases identified by Lord Hope in which the payers were aware that there was an issue of law which was relevant, but doubtful, and in respect of which a decision was taken to make the payments appreciating the risk that the basis upon which they were made might be mistaken.”

In Marcic the claimant brought an action against the defendant, Thames Water Utilities Ltd. a statutory sewerage undertaker under the Water Industry Act 1991, for damage to his property caused by escapes from Thames Water’s surface water sewers (which Thames Water had inherited from its predecessor). Thames Water’s conduct as a statutory sewerage undertaker was regulated by an elaborate statutory scheme, which gave no direct right of action to persons injured by a contravention of the statutory scheme. The judge at first instance held that Thames Water was not liable for the escapes at common law, since it had neither caused nor created the nuisance, but that its failure to take steps to abate the nuisance contravened article 8(1) of the European Convention on Human Rights. The Court of Appeal upheld the judge’s decision, and held in addition that Thames Water was liable at common law. The House of Lords allowed the defendant’s appeal. One of its grounds for doing so was that for the common law to provide a direct remedy to the claimant would be inconsistent with the statutory scheme and would thus run counter to the intention of Parliament.

The relevance of Marcic for present purposes lies in the analogy between the statutory scheme under consideration in that case and TMA section 33.

In paragraphs 33 to 36 of his speech, Lord Nicholls of Birkenhead said this:

“33…. I must respectfully part company with the Court of Appeal. The Goldman and Leakey cases exemplify the standard of conduct expected today of an occupier of land towards his neighbour. But Thames Water is no ordinary occupier of land. The public sewers under Old Church Lane are vested in Thames Water pursuant to the provisions of the 1991 Act, section 179, as a sewerage undertaker. Thames Water's obligations regarding these sewers cannot sensibly be considered without regard to the elaborate statutory scheme of which section 179 is only one part. The common law of nuisance should not impose on Thames Water obligations inconsistent with the statutory scheme. To do so would run counter to the intention of Parliament as expressed in the Water Industry Act 1991.

34.

In my view the cause of action in nuisance asserted by Mr Marcic is inconsistent with the statutory scheme. Mr Marcic's claim is expressed in various ways but in practical terms it always comes down to this: Thames Water ought to build more sewers. This is the only way Thames Water can prevent sewer flooding of Mr Marcic's property. This is the only way because it is not suggested that Thames Water failed to operate its existing sewage system properly by not cleaning or maintaining it. Nor can Thames Water control the volume of water entering the sewers under Old Church Lane. Every new house built has an absolute right to connect. Thames Water is obliged to accept these connections: section 106 of the 1991 Act. A sewerage undertaker is unable to prevent connections being made to the existing system, and the ingress of water through these connections, even if this risks overloading the existing sewers. But, so Mr Marcic's claim runs, although Thames Water was operating its existing system properly, and although Thames Water had no control over the volume of water entering the system, it was within Thames Water's power to build more sewers, as the company now has done, to cope with the increased volume of water entering the system. Mr Marcic, it is said, has a cause of action at law in respect of Thames Water's failure to construct more sewers before it eventually did in June 2003.

35.

The difficulty I have with this line of argument is that it ignores the statutory limitations on the enforcement of sewerage undertakers' drainage obligations. Since sewerage undertakers have no control over the volume of water entering their sewerage systems it would be surprising if Parliament intended that whenever sewer flooding occurs, every householder whose property has been affected can sue the appointed sewerage undertaker for an order that the company build more sewers or pay damages. On the contrary, it is abundantly clear that one important purpose of the enforcement scheme in the 1991 Act is that individual householders should not be able to launch proceedings in respect of failure to build sufficient sewers. When flooding occurs the first enforcement step under the statute is that the Director, as the regulator of the industry, will consider whether to make an enforcement order. He will look at the position of an individual householder but in the context of the wider considerations spelled out in the statute. Individual householders may bring proceedings in respect of inadequate drainage only when the undertaker has failed to comply with an enforcement order made by the Secretary of State or the Director. The existence of a parallel common law right, whereby individual householders who suffer sewer flooding may themselves bring court proceedings when no enforcement order has been made, would set at nought the statutory scheme. It would effectively supplant the regulatory role the Director was intended to discharge when questions of sewer flooding arise.

36.

For this reason I consider there is no room in this case for a common law cause of action in nuisance as submitted by Mr Marcic and held by the Court of Appeal. On this point I agree with the decision of [the judge at first instance].”

Lord Hoffmann reached the same conclusion as Lord Nicholls. In paragraph 70 of his speech, Lord Hoffmann said this:

“The 1991 Act makes it even clearer than the earlier legislation that Parliament did not intend the fairness of priorities to be decided by a judge. It intended the decision to rest with the [Director General of Water Services], subject only to judicial review. It would subvert the scheme of the 1991 Act if the courts were to impose upon the sewerage undertakers, on a case by case basis, a system of priorities which is different from that which the director considers appropriate.”

The remainder of their Lordships (Lord Steyn, Lord Hope and Lord Scott of Foscote) agreed with Lord Nicholls and Lord Hoffmann.

In the course of his submissions, Mr Rabinowitz took us to Willis Faber (referred to by Lord Goff in Kleinwort Benson at p.374A), Air Canada (referred to by Lord Goff in Woolwich at pp.175A-176E and in Kleinwort Benson at p.373H), and Royal Insurance (referred to by Lord Goff in Kleinwort Benson at p.375B-C), pointing out that in each of these cases the mistake of law related to payments of tax. I refer to them briefly.

In Willis Faber (which was decided in 1991, that is to say before the House of Lords decision in Woolwich) the claimant insurance broker mistakenly made payments of tax on premiums which fell outside the relevant statutory taxing provision. In the course of his judgment (with which other members of the court agreed), Hefer JA said this (at pp.220G-221A):

“What is immediately apparent is that there is no logic in the distinction between mistakes of fact and mistakes of law in the context of the condictio indebiti. This condictio has since Roman times always been regarded as a remedy ex aequo et bono to prevent one person being unjustifiably enriched at the expense of another. …. Bearing in mind that the remedy lies in respect of the payment of an indebitum (i.e. a payment, without any underlying civil or natural obligation), it is clear that, where such a payment is made in error, it matters not whether the error is one of fact or law: in either case it remains the payment of an indebitum and, if not repaid, the receiver remains enriched. The nature of the error thus has no bearing either on the indebitum or on the enrichment.”

Later in his judgment, Hefer JA said this (at p.224B-C):

“Accordingly, in my judgment, our law is to be adapted in such a manner as to allow no distinction to be drawn in the application of the condictio indebiti between mistake in law (error juris) and mistake of fact (error facti). It follows that an indebitum paid as a result of a mistake of law may be recovered provided that the mistake is found to be excusable in the circumstances of the particular case.”

Since Lord Goff refers to this case at some length in Woolwich, it suffices to note that, as Lord Goff observed (ibid. p.175B), four of the seven judges thought it necessary to consider whether the taxes paid in that case were recoverable at common law. Three of the four concluded that the distinction between mistake of fact and mistake of law should play no part in the law of restitution. The fourth, Wilson J, did not find it necessary to consider that question. She concluded that the mistake of law rule “can have no application where the remedy arises not from error on the part of the taxpayer, but from the unlawful nature of the demand by the revenue” (to quote Lord Goff at ibid. p.176E).

In Royal Insurance, which was decided after Woolwich but before Kleinwort Benson, the claimant insurance company made overpayments of stamp duty on premiums in ignorance of statutory amendments which exempted certain premiums from duty. The claimant brought an action for the recovery of the overpayments. The High Court of Australia held that the overpayments were recoverable under the general law of restitution. The leading judgment was given by Mason CJ. In the course of it, he said this (at p.66):

“We begin with the proposition, accepted in David Securities, that mistake of law is no bar to recovery, and in this case there is no question but that Royal [i.e. the plaintiff insurance company] made the relevant payments in the belief that in law it was bound to do so. …. In David Securities is was accepted that: ‘the payer will be entitled prima facie to recover moneys paid under a mistake if it appears that the moneys were paid by the payer in the mistaken belief that he or she was under a legal obligation to pay the moneys or that the payee was legally entitled to payment of the moneys. Such a mistake would be causative of the payment.’ And, prima facie, that is all that is required where, as here, the recipient has no legal entitlement to receive or retain the moneys. The recipient has been unjustly enriched. ….

The belated recognition in David Securities that moneys paid away as a result of a causative mistake of law are recoverable enables us to discard some of the complications associated with the old law governing the recovery of moneys paid as and for taxes which were not due and payable because causative mistake of law was not thought to be a sufficient basis of recovery. Recovery was permitted only in cases in which money was exacted under an unlawful demand by a public authority where the payment was made under a mistake of fact of under compulsion of some kind. The relevant principles have been examined …., very recently, by the House of Lords in [Woolwich]. In Woolwich, the House of Lords, though unwilling to acknowledge that causative mistake of law is a basis for recovery, reformulated the principles so as to recognise a prima facie right or recovery based solely on payment of money pursuant to an ultra vires demand by a public authority. With that development of the law of restitution in England we are not presently concerned because, as I have explained, Royal made the relevant payments as a result of a causative mistake of law. In conformity with David Securities, payment in these circumstances opens the gateway to recovery where the payment results in the enrichment of the defendant at the expense of the plaintiff.”

In paragraph 15 of his judgment, the judge observed (plainly correctly) that it is clear from the decision of the House of Lords in Kleinwort Benson that English law recognises a claim in restitution to recover money paid under a mistake of law. In paragraph 17 of his judgment, he turned to the question whether such a claim is available where the money was paid to the revenue in discharge of what was mistakenly thought to be a liability for taxes, saying this:

“In principle it is hard to see why that should make any difference, but the question must be considered with some care because of three paragraphs in Lord Goff’s speech ….”.

The judge then quoted the second, third and fourth paragraphs in the passage from Lord Goff’s speech which I have quoted in paragraph 93 above. The judge continued (in paragraph 18 of his judgment):

“Is Lord Goff saying in those paragraphs that the cause of action for restitution of money paid under a mistake of law, the existence of which he, Lord Hoffmann and Lord Hope are affirming, does not apply to money mistakenly paid in taxes? In my judgment the answer is that he is not. In support of my view I make the following points.

(i)

There is certainly no principle that, for public policy reasons or for other reasons, there can never be restitutionary claims for recovery of taxes wrongly paid. See [Woolwich], recognising the existence of a restitutionary claim in respect of tax paid under protest in response to what turned out to have been an unlawful statutory demand.

(ii)

If Lord Goff intended to say that, although money paid under a mistake of law was generally recoverable, money paid in taxes under a mistake of tax law was not, he would not have said it at the point in his speech where the three paragraphs which I have quoted appear. The general structure of the speech was to begin with an analysis of whether a cause of action for restitution of payments made under a mistake of law existed at all, and then, having concluded that it did, to go on to consider whether there were any defences to such a cause of action which might apply in particular cases. If His Lordship wished to say that a cause of action for payments of taxes made under a mistake of law did not exist he would surely have dealt with the point in the first part of his speech. However, the paragraphs which I have quoted appear in the second part of the speech, and in particular in a section where Lord Goff is considering whether the House of Lords should introduce a ‘settled law defence’ along the lines of a proposal which had been made by the Law Commission. The Commission had considered that legislation would be necessary to create a settled law defence, and in a draft Bill had included a provision expressed as follows: ‘An act done in accordance with a settled view of the law shall not be regarded as founding a mistake claim by reason only that a subsequent decision of a court or tribunal departs from that view.’

(iii)

In the context I do not believe that Lord Goff was saying that there could never be a restitutionary claim for tax paid by mistake. Rather he was observing that, although there could be such a claim, the courts might at some future time have to consider whether there was also a settled law defence. In the Kleinwort Benson case itself he went on to decide that (at common law, and leaving out of account possible future legislative changes) there was no such defence where the mistaken payments had been made under private law. He did not wish to be understood as deciding the same thing where the payments were tax payments. However, he was not deciding that there was a settled law defence in the case of tax payments. He was leaving the matter open.

(iv)

In the present case the submission put to me by Mr Glick QC on behalf of the revenue was that a cause of action for the restitution of tax payments made under a mistake of law did not exist at all. He expressly said that, if I considered that the cause of action did exist, he did not invite me to decide at High Court level that a settled law defence might be available. He reserved the right to advance such an argument in a higher court, and I gave permission for an amendment to the revenue’s defence which would lay the basis for such an argument if the revenue wish to advance it hereafter.

(v)

In the earlier part of Lord Goff’s speech, where he discussed whether there should be a cause of action in restitution for money paid under a mistake of law, he reviewed a number of authorities in other jurisdictions which had held that such a cause of action did exist. Among them was the South African case of [Willis Faber]. That was a tax case in which a restitutionary claim for the recovery of tax paid under a mistake of law succeeded. The impression which I glean from the speech is that Lord Goff approved of the Willis Faber decision and saw no objection to a similar result forming part of United Kingdom law.

(vi)

In none of the other speeches in the House of Lords, either of the majority or of the minority, is there any suggestion that there could be a difference between payments of tax made under a mistake of law and payments of different kinds made under a mistake of law.”

In paragraph 19 of his judgment, the judge referred to the judgment of Brooke LJ in Eagerpath, and to Brooke LJ’s apparent assumption that a taxpayer who has made an overpayment of tax under a mistake of law has a claim at common law based on his mistake. The judge pointed out that Brooke LJ’s observations in this respect were obiter, and he doubted whether, in making those observations, Brooke LJ had considered the passages from Lord Goff’s speech in Kleinwort Benson which the judge had quoted earlier. The judge continued:

“In the circumstances I do not attach much weight to his observations, but they are at least a tentative opinion of a Court of Appeal judge that tax payments made by mistake can be recovered.”

It is of course common ground that Woolwich establishes that there is a cause of action for the recovery of tax paid under an unlawful demand, whether or not the payment was made under a mistake of law (for in Woolwich itself there was no such mistake); but it is plain that the judge is here referring to a cause of action for the recovery of overpaid tax on the ground that the payment was made under a mistake of law.

In paragraphs 20 to 32 of his judgment the judge addressed the question whether DMG made its payments of ACT under a mistake of law: a question to which, as he made clear in paragraph 20, his answer was Yes. However, he went on to say that the mistake in the instant case could not be described in terms as simple as those which Lord Goff had used to describe the mistake in Kleinwort Benson. The judge concluded that there were two reasons for this. He explained the first of these two reasons in paragraphs 21 and 22 of his judgment, as follows:

“21.

The first reason is this. The relevant United Kingdom tax provisions did not did not take the simple form of providing that, if a subsidiary paid a dividend to another company which was in the same group, it did not have to pay ACT. They provided: (1) that if the companies were in a group relationship, they could make a group income election; (2) that if there was a group income election in force at the time of payment of a dividend, ACT was not payable (unless the companies specifically gave notice to the contrary as regards a particular dividend); (3) that a group income election did not take effect for three months or, if earlier, until the inspector notified the companies that he accepted it; and (4) that an election would be of no effect if, in those three months, the inspector notified the companies concerned that he was not satisfied that it was validly made. See generally ICTA s.247(2) and (3), s.248(2). On the last point, if the inspector gave notice that he was not satisfied that an election was validly made the companies could appeal, but unless and until the appeal was determined in the companies’ favour, there was no group income election in force. It followed that as a matter of law ACT was properly payable in respect of dividends paid in the meantime, and even a successful appeal against the refusal of a group income election would not change that position. The dividends paid while the appeal was pending continued to give rise to ACT liabilities, and the success of the appeal would only be relevant to future dividends paid after the appeal decision. See as to this observations of the CJEC in paragraph 104 of its judgment in [Metallgesellschaft].

22.

The point which emerges from the foregoing is that, on a close analysis, the mistake of law which DMG made was not that it paid ACT which was not payable: the ACT was as a matter of law payable when DMG paid it, and the decision of the CJEC in [Metallgesellschaft] does not mean that it was not payable. Rather the mistake of law which DMG made was that it did not realise that it and DBI could have made group income elections with DBAG, which would have had the effect of preventing the ACT from being payable.”

The judge then turned (at paragraph 23 of his judgment) to the second of his two reasons. He began by noting Mr Glick’s reliance, so far as the 1996 payment is concerned, on the fact that the payment was made after the commencement of the Metallgesellschaft litigation (which was commenced in April 1995) and after DMG, through its Head of Taxation Mr Thomason, had become aware of the Metallgesellschaft litigation (which the judge found to have occurred by, at the latest, early July 1995). The judge went on to note that the position in relation to the 1993 payment and the 1995 payment was more complicated because both those payments were made before the commencement of the Metallgesellschaft litigation. He noted Mr Glick’s argument in relation to the 1993 payment and the 1995 payment that even if DMG was suffering from a mistake when it made these payments, it discovered its mistake by July 1995 when Mr Thomason became aware of the argument which the taxpayers in Metallgesellschaft were putting forward.

However, in paragraph 24 of his judgment the judge concluded that all three payments (including, that is to say, the 1996 payment) were made under a mistake of law. As to the 1993 payment and the 1995 payment, the judge said this (in paragraph 25 of his judgment):

“At the times of the first and second dividends and of the two ACT payments to which they gave rise DMG knew nothing about the argument that, by virtue of EC law, it and DBI were entitled to make group income elections with DBAG despite the express provision in section 247 that they were not. Because of the CJEC decision in [Metallgesellschaft] DMG knows now that the true state of the law then was that the companies were entitled to make group income elections; the revenue knows that now as well; indeed we all do. But we did not know that then. If the true state of the law had been known at the time the companies would have made elections and DMG’s dividends would have been paid under them as group income, not attracting a liability on DMG’s part to pay ACT. At this stage in the analysis it must be assumed that, if the true state of the law had been understood, both DMG and the revenue would have understood it. In other words we know now that DMG, DBI and DBAG were mistaken in thinking that DMG and DBI could not make group income elections with DBAG; if they had not been mistaken in that respect they would have made elections; if they had made elections all of the DMG dividends which in fact attracted ACT would not have attracted ACT. Therefore the ACT which DMG in fact paid was paid under a mistake of law: if the mistake had not existed the ACT would not have been paid. It is, however, important to appreciate that the mistake was not directly a mistake about whether there was a liability to pay ACT. It was directly a mistake about whether group income elections could be made. The liabilities to pay ACT arose as secondary consequences of that primary mistake.”

The judge then addressed the significance of the fact that by mid-July 1995 DMG knew of the Metallgesellschaft litigation. He began by pointing out that in relation to the 1996 payment the question was whether that payment was made under a mistake of law; and that in relation to the 1993 payment and the 1995 payment the question was whether, if (as in his view was the case) those payments were made under a mistake of law, DMG discovered its mistake in July 1995.

In paragraph 27 of his judgment, the judge referred to the evidence of Mr Thomason, quoting a passage from Mr Thomason’s witness statement where he said this:

“[A]t all times prior to the determination of [the ECJ] in [Metallgesellschaft], I believed that the UK statute denying the ability to make a group income election was the law and I was bound to act in accordance with this law …. It did not occur to me that I could ignore the law as it stood for the simple reason that the law is the law. Just because another taxpayer challenged the law that did not mean that I could or should ignore it.”

The judge continued as follows:

“Mr Thomason was cross-examined, but I do not believe that the foregoing passage was challenged or affected by his answers on other points. He added the general point (obvious but plainly relevant) that it was not clear in 1995 what would be the outcome of [Metallgesellschaft]. He also said that there were more arguments being advanced by [the claimants in Metallgesellschaft] in 1995 than the one which eventually succeeded in the [ECJ]. For example, relief was being claimed by Metallgesellschaft AG, the German parent company, as well as by the United Kingdom subsidiary which had paid the dividends and the associated ACT. In addition arguments were being advanced in reliance, not on the EC Treaty, but on the non-discrimination article in the Double Taxation Agreement between the United Kingdom and Germany.”

In paragraphs 28 to 32 of his judgment, the judge set out his own analysis of the position, as follows:

“28.

I now proceed with my own analysis of the position. It is obvious that, when DMG learned of the argument which Metallgesellschaft was advancing, it had come to know something – to discover something – which it had not known before. That is true, but DMG did not come to know, or to discover, that it and DBI could make group income elections with DBAG after all. All that it discovered was that another company was arguing that it could make a group income election with its German parent company in comparable circumstances, and that the revenue were disputing the argument. I examine the position as matters actually stood before DMG paid the dividend which it was planning to pay and did pay in July 1995. If at that time DMG and DBI had submitted group income elections with DBAG, it is in my opinion certain that the inspector would have rejected the elections within the three month period which was available to him under section 248(2). Short of DMG abandoning the intention to pay dividends altogether (which I assume would have been unacceptable to the group as a whole) DMG would have had to pay the ACT. Further, such ACT would have been correctly paid even if DMG had appealed against the rejection of the elections and a later decision (like the actual decision in [Metallgesellschaft]) showed that the inspector ought to have accepted them. (See as to this paragraphs 21 and 22 above.)

29.

Concentrating for the moment on the first and second ACT payments (the payments associated with the dividends which DMG paid in July 1993 and July 1994), I repeat that the mistake which DMG made at those times was that it did not realise that it and DBI could have made valid group income elections with DBAG. In 1995, when DMG learned of the case which Metallgesellschaft had begun against the United Kingdom Revenue, it did not discover that it (DMG) and DBI could have made group income elections with DBAG after all. All that it discovered was that there was a possible argument that they could have done that. So it did discover something, but not something which made any difference to the matters which are critical in this case. Suppose that back in 1993, when DMG was planning to pay the first of the dividends, it had already known what it actually discovered in 1995: that there was an argument that group income elections could be made with parent companies in Member States other than the United Kingdom, but that the revenue did not agree with the argument. Would DMG, DBI and DBAG have submitted group income elections then? I do not think that they would. Still less do I think that, if they had submitted elections then, DMG would not have been liable to pay ACT when it paid the dividends. I have no doubt that the revenue would have rejected the elections, and that DMG would have been liable to pay the ACT and would have paid it.

30.

Accordingly, my conclusions in relation to the first two ACT payments are (1) that DMG did pay them under a mistake of law; (2) that, unless a limitation defence applies, DMG is entitled to claim restitution on the basis of a mistake of law; (3) that DMG did not discover its mistake in 1995 when it learned about the argument which Metallgesellschaft was advancing; (4) that therefore the limitation period applicable to DMG’s mistake of law claim did not begin to run in or about July 1995; and (5) that no limitation defence applies. In my opinion DMG did not discover its mistake until the decision of the CJEC in [Metallgesellschaft] was released on 8 March 2001. DMG had already commenced its action claiming relief before then: it did so shortly after the Advocate General’s opinion was delivered. That opinion was in favour of the claimants, and thus it foreshadowed the later decision of the CJEC itself. It might be arguable that DMG discovered its mistake at the time of the Advocate General’s decision. I would not take that view myself: it was not inevitable that the CJEC would take the same view as the Advocate General. But the point does not matter, because, even if the limitation period started to run at the time of the Advocate General’s opinion, DMG commenced its action only a month and a day later (12 September 2000 and 13 October 2000).

31.

As regards the third ACT payment – the one made on 14 January 1996 – DMG knew about the Metallgesellschaft argument when it paid the ACT, and it had also known about the argument when it and DBI made no attempt to make group income elections before it paid the dividends on 17 July 1995. Notwithstanding that, I accept that DMG paid the ACT under a mistake of law, and is in principle entitled to restitution for the timing disadvantage which it thereby suffered. The limitation period would only start to run against DMG on the release of the CJEC decision, by which time it had already commenced its claim for relief.

32.

The result is that in my judgment DMG’s claims succeed and that none of them is statute barred. I will, however, briefly indicate what I believe the position would have been if I am wrong and if, once DMG knew of the Metallgesellschaft argument in 1995, it was no longer suffering from a relevant mistake.”

In paragraphs 33 to 40 of his judgment, the judge addressed the question whether, on the assumption that the 1993 payment, the 1995 payment and the 1996 payment were made under a mistake of law, DMG was (contrary to his view) no longer mistaken once it learned of the argument being advanced by the taxpayers in Metallgesellschaft.

As to the 1993 payment and the 1995 payment, the judge assumed that in relation to those payments the limitation period began to run on 1 July 1995, with the consequence that claims in respect of those payments would be statute-barred unless brought before 1 July 2001. He noted that the claim form was issued on 13 October 2000 (i.e. within the limitation period, so computed), but he noted also the issue as to whether that was the relevant date for computing the limitation period, or whether the relevant dates for this purpose were the dates on which the Schedule to the Particulars of Claim was amended to include details of the payments in question (i.e. 16 August 2001 in relation to the 1993 payment and 19 August 2002 in relation to the 1995 payment). He defined this issue in paragraph 34 of his judgment, as follows:

“…The question is whether the claim form and the particulars of claim as they were originally expressed always claimed relief in respect of the ACT payments made in October 1993 and February 1995, or whether claims in respect of those particular ACT payments were new claims added by amendments made on 16 August 2001 (as respects [the 1993 payment) and on 19 August 2002 (as respects [the 1995 payment]). If they were new claims added to the particulars of claim by the amendments, and if (contrary to my view) the limitation period had started running on or about 1 July 1995, the claims would be time barred by the Limitation Act. In my opinion, however, the original particulars of claim, on their proper interpretation, already claimed relief in respect of [the 1993 payment] and [the 1995 payment].”

The judge addressed this issue as follows (in paragraphs 35 and 36 of his judgment):

“35.

This is a fine point on the small print wording of the particulars of claim, and I will not go into it at length. The critical point is that the particulars claimed relief in respect of all payments of ACT made by reference to ‘the Dividends’. ‘The Dividends’ was a defined term: it meant the dividends which DMG had paid from time to time to DBI and DBAG, thus (as it seems to me) covering all dividends, including those which had led to [the 1993 payment and the 1995 payment]. The original particulars of claim did say that the payments of ACT ‘include but are not limited to’ certain payments set out in a schedule. The payments so set out did not include [the 1993 payment or the 1995 payment]: those payments were only added to the schedule by the amendments made more than six years after 1 July 1995. However, in my view the original particulars of claim claimed relief in respect of all payments of ACT which had been made by DMG in respect of all dividends paid by it to DBI and DBAG. The claim was not limited to the payments specified in the schedule.

36.

In this respect the original particulars of claim were different from those which I considered in the recent case of Metallgesellschaft United Kingdom Ltd v IRC [2003] EWHC 1002 (CH). The particulars of claim in that case (as I interpreted them) only claimed relief in respect of the specific ACT payments which were identified in a schedule, so that when the schedule was amended to add further payments the amendment had the effect of adding new claims in respect of additional causes of action. In the present case, in contrast, I consider that the amendments did not add new claims, but rather gave further details of claims which had already been made within the causes of action which had already been pleaded. Therefore, even if, contrary to my view, the six years limitation period started to run in July 1995 as respects [the 1993 payment and the 1995 payment], I still consider that DMG’s claims for relief in respect of those two payments were brought within the period and are not statute barred.”

In paragraphs 37 and 38 of his judgment the judge reached the same conclusion in relation to the 1996 payment.

The judge summarised his conclusions in paragraphs 41 and 42 of his judgment, as follows:

“41.

In the result I conclude that DMG’s claims, in so far as they are formulated as claims for restitution in respect of money paid under a mistake of law, succeed in principle, and that they are not time-barred by the Limitation Act 1980. I wish only to add that this is not a result which I reach with much enthusiasm. When Parliament first enacted the predecessor of section 32(1)(c) of the Limitation Act 1980 (postponing the running of the limitation period in claims based on mistake until the mistake is discovered), it did not have in mind claims for recovery of money based on a mistake of law, particularly a mistake which was shared by almost everyone else at the time. This was one consideration which influenced the dissenting minority in Kleinwort Benson. ….

The three Law Lords in the majority clearly felt that the limitation consequences of their decision would be unacceptable in the long term and would have to be changed. ….

The Law Commission considered the matter in its major report on Limitation of Actions …. However, no legislation consequent upon that report has yet been enacted.

42.

In the circumstances I believe that I am bound by the decision of the majority in the House of Lords in Kleinwort Benson to hold that a cause of action for recovery of money paid under a mistake of law does exist, and that where such an action is commenced section 32(1)(c) of the Limitation Act 1980 applies with the effect that the limitation period does not begin to run until the mistake is discovered. For the detailed reasons which I have given in this judgment, I consider that DMG did make the three payments of ACT under a mistake of law; that DMG is therefore entitled to restitution; that it makes no difference that the payments were tax payments; and that DMG’s claims for restitution are not time-barred by the 1980 Act. For those reasons I will give judgment in favour of DMG.”

By their grounds of appeal the appellants contend:

In addition, as noted earlier (see paragraph 18 above), the appellants also contend that even if DMG would otherwise have a cause of action for mistake of law, the nature of the mistake which it made is not such as is capable of founding such a cause of action (the mistake of law issue).

The cause of action issue

Mr Glick relies heavily on the passage in Lord Goff’s speech in Kleinwort Benson at pp. 381A-382A (quoted in paragraph 93 above) in support of the submission that the principle established in that case does not extend to overpayments of tax. He submits that in that passage Lord Goff is recognising a clear distinction between overpayments of tax made under a mistake of law and other payments so made. He lays particular stress on Lord Goff’s reference to “separate and distinct regimes”, and on his description of the first such regime as comprising payments made pursuant to an unlawful demand – which are recoverable as of right under the principle established in Woolwich – “and otherwise are the subject of statutory regimes regulating recovery”. He submits that this passage in Lord Goff’s speech makes clear that there is no place for a restitutionary claim at common law in respect of an overpayment of tax simply because the overpayment was made by mistake, and that a restitutionary remedy for such an overpayment is available only on the Woolwich principle (in cases where the mistaken payment was made pursuant to an unlawful demand) or under the terms of the relevant statutory regime.

Mr Glick submits that the reason for the distinction drawn by Lord Goff in the passage in question is that Parliament has enacted specific provisions dealing with the recovery of tax which has been overpaid by reason of a mistake. In relation to corporation tax, those provisions are to be found in TMA section 33. Mr Glick points out that the remedy available under TMA section 33 differs markedly from any remedy at common law for payment made under a mistake. First, there is the requirement (in TMA section 33(1)) that the mistake is made in a return which results in an excessive assessment. Secondly, as already noted, there is the six-year time limit imposed by that subsection. Thirdly, no relief is given under TMA section 33 where the return was made on the basis of, and accordance with, the practice generally prevailing at the time it was made (see the proviso to TMA section 33(2)). Fourthly, the Board has power (under TMA section 33(3)) to consider whether the granting of relief would result in the exclusion from charge to tax of any part of the claimant’s profits. In addressing this question, the Board may take into consideration the claimant’s liability to tax and any assessments made on him in respect of chargeable periods other than that to which the claim relates; whereas no such flexibility would be imported into any corresponding common law remedy.

Mr Glick submits that in recognising that repayments of tax are excluded from the common law remedy for mistake, Lord Goff was merely founding on the common law principle, applied recently by the House of Lords in Marcic (see paragraphs 118 to 122 above), that a common law remedy will be excluded where Parliament has enacted a statutory scheme which is inconsistent with that remedy. The rationale of that principle, he submits, is that the existence of a limited statutory remedy impliedly negatives any wider remedy at common law. He submits that a common law right to recover taxes overpaid under a mistake of law would be inconsistent with the statutory scheme in TMA section 33. He points out (relying on Lord Slynn’s speech in Woolwich, quoted in paragraph 70 above) that TMA section 33 cannot operate to exclude a common law remedy where the payment in question is made pursuant to an unlawful demand.

Mr Glick accordingly submits that the Kleinwort Benson principle does not extend to claims in relation to tax which is overpaid, or (as in the instant case) paid prematurely. He submits that this conclusion may be reached either by distinguishing between payments of tax and other payments, or by treating a Kleinwort Benson claim as being excluded by TMA section 33.

He further submits that in Eagerpath Brooke LJ was in error in assuming that a cause of action for mistake of law can exist in relation to an overpayment of tax in circumstances where TMA section 33 does not apply; and that in making that erroneous assumption Brooke LJ failed to recognise that, far from being merely a historical curiosity, TMA section 33 represents the latest formulation of a provision which has been on the statute book, in broadly the same form, since 1923.

Mr Glick also referred us to section 320 of the Finance Act 2004, which provides protection for tax revenues following a High Court judgment which is being appealed, and which (he tells us) was enacted as a direct consequence of Park J’s decision in the instant case. In summary, the effect of the section is to disapply section 32(1)(c) in relation to actions brought after 8 September 2003, and to prevent claims being added by amendment to existing claims on or after 20 November 2003.

Mr Rabinowitz supports the judge’s reasoning and conclusions on this issue.

As to the passage in Lord Goff’s speech in Kleinwort Benson on which Mr Glick principally relies, Mr Rabinowitz acknowledges that restitutionary claims in relation to overpayments of tax may call for separate treatment when considering the defences which may be available, but he submits that when the speech is read as a whole it is plain that Lord Goff is not intending, by his reference to “separate and distinct regimes”, to limit the availability of a cause of action for mistake of law to cases involving private transactions. He submits that, had Lord Goff intended to import such a fundamental qualification on the extent of the abrogation of the mistake of law rule, it is inconceivable that he would not have said so in the clearest terms.

In support of the above submissions Mr Rabinowitz points out, as noted earlier, that three of the decisions in other jurisdictions to which Lord Goff makes special reference in Woolwich and/or in Kleinwort Benson – viz. Willis Faber, Air Canada and Royal Insurance – were cases of mistake of law involving overpayments of tax. He submits that this is the clearest indication that in referring to “separate and distinct regimes” Lord Goff was not intending to suggest that no cause of action for mistake of law could exist in relation to overpayments of tax: he was merely considering the circumstances in which a ‘settled law defence’ might be available, and expressing the view that in that context overpayments of tax could be regarded as being on a different footing from payments under private transactions at least to the extent that there may be a stronger case for the recognition of a ‘settled law defence’ where an overpayment of tax is involved.

Mr Rabinowitz makes the further point that Lord Hope, in Kleinwort Benson, also refers to Air Canada (among other authorities) when discussing the possible existence of a ‘settled law defence’.

Turning to the consequences which would follow were the appellants’ argument on the cause of action issue to be held to be correct, Mr Rabinowitz submits that a claimant who had unjustly enriched the revenue by making an overpayment of tax under a mistake of law in circumstances where the demand was not unlawful would in that event be in a worse position than a claimant who had unjustly enriched the other party to a private transaction. The latter would be entitled to a restitutionary remedy under the principle in Kleinwort Benson whereas the former would not. Mr Rabinowitz submits that Lord Goff cannot have intended such an unjust result.

As to TMA section 33, Mr Rabinowitz points out that, far from putting in place an exhaustive regime, that section provides a remedy for overpayment of tax made by mistake only in the most limited circumstances. He asks, rhetorically: What is the position of a claimant who has made such an overpayment, but who cannot invoke the Woolwich principle because the demand was not unlawful, and who cannot (for whatever reason) have recourse to TMA section 33? He submits that an interpretation of the Kleinwort Benson principle which left such a claimant without any restitutionary remedy would leave a huge gap in the law, and that Brooke LJ in Eagerpath was right to assume that such a claimant would be entitled to such a remedy at common law.

Mr Rabinowitz also relies on the reasoning and conclusion of Coghlan J in Mallusk (see paragraphs 106-111 above).

Mr Rabinowitz submits that the (admitted) fact that in the instant case DMG has a good cause of action based on the Woolwich principle is nothing to the point. He submits that there is nothing strange or surprising in the existence of concurrent causes of action founded on the precisely same facts.

Finally, Mr Rabinowitz invites us to conclude that the merits of the case are entirely with DMG; and that it would be unjust for the revenue to retain payments of ACT made under a mistake.

The mistake of law issue

As noted earlier, Mr Glick supports the judge’s conclusion (in paragraphs 22 and 25 of his judgment, quoted in paragraphs 132 and 134 above) that the ACT in question was legally due and payable when it was paid, and that DMG’s mistake was “a mistake about whether group income elections could be made” (see paragraph 25 of his judgment).

Mr Glick submits that a mistake of that nature cannot in any event found a restitutionary claim at common law, since the mistake was not as to the payer’s liability to make the payment; rather, the mistake was in not taking action which would have resulted in there being no liability on the payer to pay. He submits that if it were otherwise, a taxpayer who had received inadequate tax advice and as a result had been deprived of an opportunity of saving tax or of mitigating his tax liability could in effect reopen an issue as to his tax liability at any time in the future, regardless of any time limit which might be incorporated into the relevant statutory regime (e.g. the six-year time limit imposed by TMA s.33(1)).

In support of his submissions on the mistake of law issue, Mr Glick referred us to paragraph 47 of Mr Thomason’s witness statement, which the judge quotes in paragraph 27 of his judgment (see paragraph 136 above).

Mr Glick also referred us to passages in the cross-examination of Mr Thomason where he indicated that his understanding from July 1995 onwards was that the ECJ’s decision in Metallgesellschaft would regulate the position for the future, but that it would not affect the fact that the ACT in question was legally due and payable at the time it was paid.

Mr Rabinowitz characterises DMG’s mistake of law as being simply its mistaken belief that the ACT in question was legally due and payable when demanded. He submits that in Metallgesellschaft the ECJ decided that the statutory regime in question contravened Community law; that demands made under that regime were consequently unlawful; and that a taxpayer faced with such a demand is entitled to refuse to pay. He submits that a mistake by a claimant as to liability to pay falls fairly and squarely within the Kleinwort Benson principle.

Mr Rabinowitz accordingly submits that, in relation to each of the three payments in question, DMG’s mistake was of such a nature as to be capable of founding a cause of action for mistake of law and of engaging section 32(1)(c).

The section 32(1)(c) issues

On the assumption (contrary to his earlier submission) that the mistake made by DMG in paying the ACT in question was of such a nature as is capable of founding a cause of action for mistake of law, Mr Glick submits (as he submitted to the judge) that the mistake was discovered by DMG at the latest by July 1995. By that time, as is common ground, DMG knew (a) that the claimants in Metallgesellschaft were claiming compensation on the basis that the statutory regime governing group income elections was contrary to Community law and (b) the arguments which the claimants were deploying in support of that claim.

In support of the above submission, Mr Glick took us once again to the transcript of Mr Thomason’s cross-examination. In cross-examination, Mr Thomason gave evidence that in early July 1995 Herr Langel (the global head of tax at Deutsche Bank, DMG’s parent company) came to London for the specific purpose of discussing with Mr Thomason potential German tax issues arising from the closer integration of Deutsche Bank and DMG, with particular reference to the making of protective group income elections pending the ECJ decision in Metallgesellschaft. Mr Thomason’s evidence was that his understanding at that time was that the challenge brought by the claimants in Metallgesellschaft had merit, but that he was uncertain whether the challenge would succeed. He said he believed he had recommended to Herr Langel that protective elections should be made, but further dividends were paid before any answer was received. Asked by Mr Glick whether the fact that he had considered a protective group income election indicated that, in the light of Metallgesellschaft, there was a doubt in his mind whether a group income election might be available as between a UK subsidiary and a parent resident in another Member State, Mr Thomason said this (Day 2, p.164 line 11):

“Yes, I could see the question was there. I think in a way I saw it as something that was more likely to be resolved in the future and cause us to put a group income election into place or change our behaviour at a future time.”

However, Mr Thomason went on to acknowledge that in practice it had been decided to go ahead with payment of dividends in July 1995, before the doubt could be resolved. Later in his cross-examination, he agreed with Mr Glick that when it came to paying dividends in 1998 or 1999 a decision was taken by DMG that it would not try to make a group income election before hand, but would await the outcome of the Metallgesellschaft litigation.

As to the 1993 payment and the 1995 payment, Mr Glick submits that it does not require an authoritative judgment of a court in order for a party who made the payment to have discovered his mistake and for the limitation period to start to run: it is enough that the party who made the payment understood that the relevant legislative regime was the subject of serious legal challenge.

As to the 1996 payment, Mr Glick relies on the dicta of Lord Hope in Kleinwort Benson (quoted in paragraphs 97 and 100 above) that a person who pays when in doubt takes the risk that he may be wrong, and that a payment made in the knowledge that there was a ground to contest liability will be irrecoverable.

Mr Glick submits that the mischief at which section 32 of the 1980 Act is directed is that of a person making a payment in ignorance of the fact that he was not obliged to pay. A party who makes a payment when he is aware that there is no obligation to pay should not (he submits) be allowed to rely on the provisions of section 32(1)(c).

On this issue Mr Rabinowitz once again supports the reasoning and conclusion of the judge.

Basing himself on the evidence of Mr Thomason, Mr Rabinowitz submits that at all times prior to the ECJ’s decision in Metallgesellschaft, DMG understood that the law was as stated in the statutory provisions (a view which, he points out, the revenue at that time demonstrably shared). He submits that where, as in the instant case, provisions of primary UK legislation are held by the ECJ to be unlawful, and where the UK has continued to assert the validity of those provisions down to judgment, the earliest a mistake as to the validity of those decisions can be discovered is when the ECJ gives its decision.

Turning to the 1996 payment, and to Mr Glick’s reliance on the dicta of Lord Hope in Kleinwort Benson, Mr Rabinowitz submits that the fundamental issue is whether it would be just for the revenue to retain money paid to it under a mistaken belief that there was a liability to pay. He submits that it would plainly be unjust for it to do so; and that mere knowledge that the statutory provisions in question are under challenge is not to be equated with a state of doubt as to the validity of those provisions.

Mr Rabinowitz submits that, looked at in the round, the proposition that the 1996 payment was made under a mistake of law accords with common sense. He points out that DMG was faced with the provisions of primary legislation; that any attempt to make a group income election would have been rejected by the revenue who, until the ECJ’s decision in Metallgesellschaft, continued vigorously to assert the validity of the statutory provisions; that even if DMG had made an election and appealed its refusal, it would still have been obliged under the express terms of the legislation to pay ACT on any dividends paid in the meantime and this would have remained the case even if it had succeeded in its appeal; and that a refusal to pay the ACT would have exposed DMG to penalties. He also reminds us that DMG was not a party to the Metallgesellschaft litigation.

The ‘settled law defence’ issue

Mr Glick makes his submissions on this issue on the assumption that his earlier submissions are rejected.

He submits that, prior to the commencement of the Metallgesellschaft litigation, there was a settled understanding that, in accordance with ICTA, a group income election could only be made where both the paying and the receiving parties were resident in the UK; and that as a consequence of that understanding the prevailing practice was that such an election would not be made where the paying company was resident in the UK but the receiving company was resident in another Member State. He submits that the appellants are entitled to rely on the existence of that settled understanding and prevailing practice as a defence to DMG’s claims based on mistake.

Mr Glick stresses that such a defence would leave open claims for restitution based on an overpayment of tax pursuant to an unlawful demand (i.e. Woolwich claims); that it would prevent an unsatisfactory situation arising in which parties would be able to reopen transactions for scrutiny many years after the transactions had been completed (in this connection he points out that, within the claims currently covered by the group litigation order, there are claims in respect of payments of ACT going back to the 1970’s); and that such a defence would satisfy the requirement of Community law that there should be an effective remedy available to a claimant who has made an overpayment of tax, albeit not a remedy which extends back for an indefinite period into the past.

In support of his submissions on this issue Mr Glick relies on the observations of Lord Goff as to the availability of a ‘settled law defence’ in the passage from his speech in Kleinwort Benson quoted in paragraph 93 above.

Mr Rabinowitz submits that English law does not recognise a ‘settled law defence’ to a claim for restitution in respect of a payment made under a mistake of law. He points out that the existence of such a defence was expressly rejected by the House of Lords in Kleinwort Benson itself. He submits, moreover, that there is no suggestion in the speeches of any of their Lordships in that case that there is any currently recognised exception in the common law to English law’s rejection of such a defence where the restitution claim involves an overpayment of tax.

He submits that in his speech in Kleinwort Benson Lord Goff was doing no more than indicating that consideration might in the future need to be given to the creation of a limited defence on grounds of public policy in cases such as he there described. He submits that had Lord Goff intended to identify an existing, recognised, ‘settled law defence’ (a) he would have done so expressly, and (b) the remainder of their Lordships would themselves have addressed the point. He further submits that there is no more reason why the formulation and introduction of a defence founded on public policy in order to prevent or limit claims against the revenue should be justified in the context of a restitutionary claim based on the Kleinwort Benson principle than in the context of a restitutionary claim based on the Woolwich principle.

In any event, submits Mr Rabinowitz (relying on the speech of Lord Hoffmann in Kleinwort Benson: see paragraph 96 above), whether or not to introduce a ‘settled law defence’ is a matter for Parliament, and not for the courts (in this connection he reminds us that by section 320 of the Finance Act 2004 Parliament has recently modified the operation of section 32(1)(c)).

The pleading issue

As explained earlier, the resolution of the pleading issue turns on whether, in amending the schedule to the Particulars of Claim to include details of the payments in question, DMG added new causes of action to those originally pleaded. If that was the effect of the amendments, then, unless it can be said that the new claims were based on the same or substantially the same facts, for limitation purposes DMG’s claims in respect of the payments in question were not brought until the amendments were made.

Mr Glick submits that in order to determine whether a new cause of action has been added by amendment it is necessary to compare the statement of case as it stood immediately before the amendments were made with the statement of case as amended; and that a new cause of action will have been added by amendment if the amendment adds previously unpleaded facts which (if established) give rise to a new cause of action (as opposed to facts which are no more than an elaboration of a cause of action previously pleaded).

Turning to the amendments made in the instant case, Mr Glick submits that separate causes of action arise in relation to each of the three payments in question, in that in relation to each payment DMG must establish:

Mr Glick submits that it follows that each payment of ACT gives rise to a new cause of action which is pleaded only when the particular payment is specified in the statement of case; and that it cannot be said that the cause of action in relation to a particular payment arises out of the same or substantially the same facts as the causes of action pleaded in relation to other payments.

The consequence of the above, Mr Glick submits, is that for limitation purposes DMG’s claims in relation to the three payments in question were not brought until the schedule to the Particulars of Claim was amended to include details of them (that is to say 16 August 2001 in relation to the 1993 payment and 19 August 2002 in relation to the 1995 payment and the 1996 payment).

Mr Rabinowitz submits that the judge was right to conclude that the amendments in question merely particularised a cause of action or causes of action which were already pleaded. He stresses that, as the judge pointed out (in paragraph 35 of his judgment, quoted in paragraph 140 above), the Particulars of Claim expressly states that the payments of ACT in respect of which restitution is sought “include, but are not limited to,” the payments listed in the (unamended) schedule.

Mr Rabinowitz submits that a cause of action is pleaded when its essential elements are pleaded; and that in the case of a payment under a mistake of law those essential elements are:

He submits that in order to plead a cause of action in relation to a particular payment it is not necessary to plead the matters leading to the making of the payment; nor (if it be suggested) is it necessary to plead precise particulars as to quantum.

The cause of action issue

The key to the resolution of the cause of action issue lies, in my judgment, in the inter-relationship between Woolwich and Kleinwort Benson. Lord Goff’s celebrated speeches in those two cases are universally acknowledged as representing contributions of the highest significance to the development of the law of restitution; and it is clear from his comprehensive treatment of the subject-matter that he cannot have intended to leave over for future consideration an issue as important as the cause of action issue. Hence the need to examine Lord Goff’s speeches, in particular, in some detail.

I begin with Woolwich. As already noted, Woolwich was not a case of mistake of law. As Lord Goff says in Woolwich (at p.171G-H):

“The taxpayer is convinced that the demand is unlawful, and has to decide what to do. …. [I]t decides to pay first, asserting that it will challenge the lawfulness of the demand in litigation”.

Thus an abrogation or relaxation of what (in Kleinwort Benson) he called ‘the mistake of law rule’ would not have met what he described (at p.171G in Woolwich) as the plain justice of the building society’s case (see also his reference to “the simple call of justice” at p.172C). Hence his attraction to the approach of Wilson J in her dissenting judgment Air Canada. Wilson J (it will be recalled) had not found it necessary to consider whether the mistake of law rule should be abrogated, taking the view that money paid under unconstitutional legislation was generally recoverable. At p.176D-E Lord Goff said this about Wilson J’s approach:

“…. I agree with her that, if there is to be a right of recovery in respect of taxes exacted by the revenue, it is irrelevant to consider whether the old rule barring recovery of money paid under mistake of law should be abolished, for that rule can have no application where the remedy arises not from error on the part of the taxpayer, but from the unlawful nature of the demand by the revenue.” (Emphasis supplied)

It seems to me that the above passage, notwithstanding that it is strictly obiter, is of direct significance in the context of the cause of action issue. Lord Goff is plainly referring to cases (of which Air Canada was one) in which there is an unlawful demand and a mistake of law by the taxpayer; indeed, if it were otherwise his reference to the mistake of law rule would not be explicable. His conclusion (as I read it) is that in such cases the mistake of law rule has no application since the taxpayer’s cause of action is founded not on his mistake but on the unlawful nature of the demand (in effect, on the revenue’s mistake): in other words, that the Woolwich cause of action effectively subsumes any cause of action which might otherwise exist for mistake of law.

Also of direct significance in the context of the cause of action issue is the importance which Lord Goff places on the fact that an ultra vires demand by definition falls outside the various statutory regimes regulating the recovery of overpaid tax, with the consequence that it is for the common law to provide a restitutionary remedy in such cases. As he put it in Woolwich at p.169D-H, when referring to TMA section 33:

“This is a case where there was no lawful basis whatever for any demand of tax to be made by the revenue. In such circumstances, the demand is ultra vires and is therefore a nullity. It follows that in a case such as the present there can be no valid assessment. …. Just as the appeal procedure presupposes a lawful assessment, so does [TMA] section 33(1), which is concerned with a lawful assessment which is excessive by reason of some error or mistake in a return.”

In consequence, as he says at p.169H:

“…. [the building society] is not enabled or required to seek its remedy through the statutory framework, but must fall back on the common law. It also follows that the common law principles, whatever they may be, are applicable to a case such as the present, unconstrained by the provisions of any statute.”

Lord Goff comes back to this point at p.170D, where he describes the point of principle as being one:

“…. upon which statute law has no direct impact”.

The importance which Lord Goff attached to the existence of the statutory regimes is also apparent from his observation in Woolwich (at p.176G-H) that:

“…. the immediate practical impact of the recognition of the [Woolwich] principle will be limited, for (unlike the present case [i.e. a case involving an unlawful demand for tax]) most cases will continue for the time being to be regulated by the various statutory regimes now in force.”

Thus the Woolwich cause of action is complementary to the various statutory regimes for the recovery of overpaid tax, in that in cases where the demand is lawful recovery of overpaid tax will be regulated by the statutory regimes; and in cases where the demand is unlawful (with the consequence that the statutory regimes do not apply) the common law supplies a restitutionary remedy.

I can turn now to Lord Goff’s speech in Kleinwort Benson.

Lord Goff’s first reference to Woolwich in his speech in Kleinwort Benson is to be found at p.375A (in the passage quoted in paragraph 89 above), where he describes Woolwich as going further than simply dispensing with the requirement that the money should have been paid under a mistake, in that it allows recovery even if the taxpayer pays in the belief that the money is not due. This, again, is entirely consistent with his observations in Woolwich with regard to Air Canada, referred to above.

Lord Goff’s next reference to Woolwich is to be found at p.381H, where he notes that in Woolwich it was held that at common law taxes exacted ultra vires were recoverable “as of right, without the need to invoke a mistake of law by the taxpayer”. He makes this reference to Woolwich in the context of the distinction which he draws at that point in his speech (at p.381G):

“…. between, on the one hand, payments of taxes and other similar charges and, on the other hand, payments made under ordinary private transactions.”

He goes on to elaborate this distinction by referring (in the passage particularly relied upon by Mr Glick) to the two “separate and distinct regimes in respect of money paid under a mistake of law”. For convenience, I set out the relevant passage once again:

“…. in our law of restitution we now find two separate and distinct regimes in respect of the repayment of money paid under a mistake of law. These are (1) cases concerned with the repayment of taxes and other similar charges which, when exacted ultra vires, are recoverable as of right at common law under the principle in Woolwich, and otherwise are the subject of statutory regimes regulating recovery; and (2) other cases, which may broadly be described as concerned with repayment of money paid under private transactions, and which are governed by the common law.”

The first of the two regimes which Lord Goff there identifies is a comprehensive and complete regime in relation to overpayments of tax made under a mistake of law. It is not limited to cases where the payment of tax is made pursuant to an unlawful demand (i.e. it is not limited to Woolwich cases); it includes payments of tax the recovery of which is regulated by statute, to which the Woolwich principle has no application. Similarly, the second regime is a comprehensive and complete regime in relation to all payments made under a mistake of law other than payments of tax.

Further, it is to be noted that in referring to both regimes as relating to “the repayment of money paid under a mistake of law”, Lord Goff is effectively excluding from the first regime cases (like Woolwich itself) where the payment is not made under a mistake of law. This is not in any way surprising, since Kleinwort Benson was concerned with the mistake of law rule, and in the passage in question Lord Goff was discussing the possible ramifications of the abrogation of that rule. By the same token, however, cases involving a payment to the revenue made pursuant to an unlawful demand and under a mistake of law are plainly included in the first regime as being payments the recovery of which is governed by the Woolwich principle. To my mind this confirms that Lord Goff was not contemplating that the claimant in such a case (i.e. a taxpayer entitled to a restitutionary remedy “as of right” on the Woolwich principle) might be in a position to found an alternative cause of action for the same remedy, based on a mistake of law.

This interpretation is, to my mind, further reinforced when one considers the second category of cases which Lord Goff includes in the first of his two regimes, viz. cases where a payment is made to the revenue which engages the relevant statutory regime regulating recovery for mistake of law (i.e. cases where the demand is lawful and the Woolwich principle accordingly does not apply). If the common law were to recognise a cause of action for mistake of law in such cases, the result would be two separate and potentially conflicting regimes regulating recovery: the common law regime and the statutory regime. Indeed, the result in the case of ACT would to produce a direct conflict between TMA section 33(1) (with its six year time limit on claims) and the more flexible provisions of section 32(1)(c) of the 1980 Act. I cannot think that Lord Goff could have contemplated such an unsatisfactory result. The alternative would be to recognise a cause of action for mistake of law in relation to payments to the revenue only in cases where the payment is made pursuant to an unlawful demand (i.e. only in Woolwich cases). However, that would (to my mind) produce a no less unsatisfactory result in that the limitation consequences of the mistake of law would differ, depending on whether or not the demand was lawful. I can see no basis in principle for distinguishing for limitation purposes between mistake of law cases where the payment to the revenue is made pursuant to a lawful demand and mistake of law cases where the payment to the revenue is made pursuant to an unlawful demand. Such a distinction would in my judgment be purely fortuitous. Once again, therefore, I cannot think that Lord Goff could have intended such a result.

In my judgment, therefore, on a true analysis of Lord Goff’s speeches in Woolwich and Kleinwort Benson, a claimant who makes a payment to the revenue under a mistake of law is not entitled to a restitutionary remedy in respect of that payment otherwise than under the Woolwich principle (where the demand is unlawful) or under the relevant statutory regime (where the demand is lawful).

In reaching the opposite conclusion, the judge made six points (in paragraph 18 of his judgment, quoted in paragraph 129 above). First, he said (referring to Woolwich) that “there is certainly no principle that, for policy reasons, there can never be restitutionary claims for recovery of taxes wrongly paid” (emphasis supplied). That is undoubtedly correct, as Woolwich itself establishes. However, the mere fact that the common law recognises an entitlement to a restitutionary remedy in respect of a payment to the revenue on the ground that the payment was made pursuant to an unlawful demand (the Woolwich principle) throws no light on the further question whether the common law also recognises such an entitlement on the ground that the payment was made under a mistake of law.

The judge’s second point is that had Lord Goff intended to say that there was no general common law right of recovery in respect of payments to the revenue, one would not have expected to find such a statement in the section of his speech in Kleinwort Benson in which he was discussing possible defences to a claim at common law for a remedy for mistake of law, and in particular the possible recognition of a ‘settled law defence’. In my judgment, however, it is natural that Lord Goff should have referred to the two “separate and distinct regimes” when considering whether the common law should recognise a ‘settled law defence’ in relation to the second of the two regimes (i.e. recovery of payments made under a mistake of law in private transactions), which was the relevant regime in Kleinwort Benson itself. As I read the passage in question, Lord Goff is merely making the point that a ‘settled law defence’ would fit more easily into the first regime than into the second. This is, I think, apparent from what follows. Thus, at p.382D-E he observes that:

“…. in cases concerned with overpaid taxes, a case can be made in favour of a principle that payments made in accordance with a prevailing practice, or indeed under a settled understanding of the law, should be irrecoverable.” (Emphasis supplied)

He continues:

“If such a situation should arise with regard to overpayment of tax, it is possible that a large number of taxpayers may be affected; there is an element of public interest which may militate against repayment of tax paid in such circumstances; and, since ex hypothesi all citizens will have been treated alike, exclusion of recovery on public policy grounds may be more readily justifiable.”

He then returns to the case before him, saying (at p.382E):

“In the present case, however, we are concerned with payments made under private transactions [i.e. the second of the two regimes].”

He goes on to observe that, in contrast to defences such as change of position or settlement of an honest claim, the proposed ‘settled law defence’ is not a defence which is directed at protecting the stability of closed transactions (i.e. transactions within the second regime); rather, it is:

“…. based on the theory that a payment made on that basis is not made under a mistake at all”.

He accordingly concludes (at p.382H):

“Once that reasoning is seen not to be correct, the basis for the proposed defence is, at least in cases such as the present, undermined.” (Emphasis supplied)

I would therefore respectfully regard the judge’s second point as a false one. Kleinwort Benson was a case within the second of Lord Goff’s two regimes. The issue as to the possible recognition of a ‘settled law defence’ arose in that context. In considering the suitability of such a defence in such cases, Lord Goff distinguished between the two regimes and concluded that whilst there were public policy arguments for the recognition of a ‘settled law defence’ in cases within the first regime, those reasons did not hold good in relation to cases within the second regime. On that basis, he rejected the possibility of a ‘settled law defence’ in Kleinwort Benson itself.

As his third point, the judge said that he did not believe that Lord Goff was saying that there could never be a restitutionary claim for tax paid by mistake: rather, he was observing that, although there could be such a claim, the courts might at some future time have to consider whether there was also a ‘settled law defence’. However, as noted earlier, Lord Goff’s first regime relates exclusively to recovery of tax paid by mistake. In respect of such payments he points out that recovery is available either under the Woolwich principle (where the demand was unlawful) or, if applicable, under the relevant statutory regime (where the demand was lawful).

As his fourth point, the judge merely recorded Mr Glick’s submission on the cause of action issue, and his reservation of the ‘settled law defence’ issue for a decision by a higher court.

As his fifth point, the judge cited Lord Goff’s reference in Kleinwort Benson (at p.374A) to Willis Faber (see paragraphs 124 and 125 above). The judge continued:

“The impression I glean from [Lord Goff’s speech in Kleinwort Benson] is that Lord Goff approved of the Willis Faber decision and saw no objection to a similar result forming part of United Kingdom law.”

On the face of it, this appears to be a point of some force; indeed, as noted earlier, Mr Rabinowitz stresses that not only Willis Faber but also Air Canada (see paragraph 126 above) and Royal Insurance (see paragraph 127 above) were cases involving overpayments of tax. However, on analysis Lord Goff’s references to these cases do not seem to me to justify the reliance which Mr Rabinowitz seeks to place upon them.

I turn first to Willis Faber. Lord Goff referred to Willis Faber merely as an example of a decision in a civil law jurisdiction in which the mistake of law rule was rejected. It mattered not for the purpose of that reference that Willis Faber involved an overpayment of tax.

Next, Air Canada. Lord Goff’s reference to Air Canada in Kleinwort Benson (at p.373H) was made in the general context of the abrogation of the mistake of law rule in common law jurisdictions and in the particular context of the concession by the respondent local authorities in Kleinwort Benson that the mistake of law rule required some modification. In the light of that concession, Lord Goff considered it unnecessary to consider in detail the criticism of the mistake of law rule made by Dickson J in Hydro Electric (a criticism which Lord Goff in Woolwich (at p.174H) described as a “devastating analysis”), which was later adopted by La Forest J in Air Canada. Reading Lord Goff’s reference to Air Canada in context, it does not seem to me that it supports DMG’s case.

Lastly on this point, I turn to Royal Insurance. As I read the relevant passage in Lord Goff’s speech in Kleinwort Benson, the only purpose of his brief reference to Royal Insurance was to point out that Mason CJ’s criticism of the decision in Woolwich (he had said that the House of Lords was “unwilling to acknowledge that causative mistake of law is a basis of recovery”) was misplaced, since no question of mistake of law arose in Woolwich. Again, it does not seem to me that this reference provides support for Mr Rabinowitz’ argument on the cause of action issue.

The judge’s sixth point was that none of the other speeches in Kleinwort Benson contains any suggestion that, in the context of mistake of law, there might be a difference between payments of tax and payments under private transactions. That is undoubtedly true, so far as it goes. However, it must be borne in mind that Kleinwort Benson was a case within the second of Lord Goff’s two regimes. In the circumstances, the fact that none of the rest of their Lordships referred to the first of Lord Goff’s regimes seems to me to be of no significance for present purposes.

The judge went on (in paragraph 19 of his judgment) to refer to the judgment of Brooke LJ in Eagerpath (see paragraph 110 above). The judge did not attach much weight to Brooke LJ’s observations (which were obiter) as to the existence of a cause of action for mistake of law in relation to a payment to the revenue, and in my judgment he was right not to do so since the point had not been raised in argument in that case.

Nor do I derive any direct assistance on the cause of action issue from the decision of this court in British Steel (see paragraphs 71 to 77 above). The case concerned an unlawful demand, and no question of a separate cause of action for mistake of law arose. The issues were, firstly, whether the demand was unlawful: and secondly whether, if it was, the relevant statutory provision negatived the existence of a common law right on the Woolwich principle.

In Mallusk, Coghlan J relied on Lord Goff’s reference in Kleinwort Benson (at p.375H) to a “general right to recover money paid under a mistake, whether of fact or law” as indicating that Lord Goff was recognising a cause of action for mistake of law in cases involving payments to the revenue. However, it is to be noted that the reference follows Lord Goff’s description of Woolwich as a case in which English law dispensed with the requirement that the payment should have been made under a mistake.

I accordingly conclude, for the reasons given above, and in respectful disagreement with the judge and with Coghlan J in Mallusk, that the appellants succeed on the cause of action issue.

In the light of this conclusion, the mistake of law issue, the section 32(1)(c) issues and the ‘settled law defence’ issue do not arise. However, for the sake of completeness I address them briefly.

The mistake of law issue

In paragraph 22 of his judgment, the judge concluded that:

“…. the ACT was as a matter of law payable when DMG paid it, and the decision of the ECJ in [Metallgesellschaft] does not mean that it was not payable.”

It followed that DMG’s belief that the ACT was due was not a mistaken belief. However, the judge went on (in paragraph 25 of his judgment) to conclude that DMG nevertheless made the payments under a mistake of law in that:

“[i]f the true state of the law had been known at the time the companies would have made elections and DMG’s dividends would have been paid under them as group income …. It was directly a mistake about whether group income elections could be made. The liabilities to pay ACT arose as secondary consequences of that primary mistake.”

With respect to the judge, I cannot agree with that analysis. In paragraph 76 of its judgment (quoted in paragraph 44 above) the ECJ held that the relevant statutory regime was contrary to Article 52, and consequently unlawful under Community law. It follows that although under the terms of that regime ACT was due and payable, “the true state of the law” (to use the judge’s expression) was that the regime gave rise to no obligation to pay. Thus the payments were made pursuant to an unlawful demand.

As to DMG’s state of mind in making the payments in question (that is to say, in practical terms the state of mind of Mr Thomason) it emerges clearly from Mr Thomason’s evidence (in particular the passage from his witness statement quoted by the judge in paragraph 27 of his judgment: see paragraph 136 above) that DMG believed that notwithstanding the pending Metallgesellschaft litigation the ACT remained due and payable. Thus, DMG’s mistake lay not in its belief that a group income election was not available, but rather in its belief that the ACT was payable when, on the true state of the law, it was not. That was plainly a mistake of law.

Moreover, I agree with Mr Rabinowitz that such a mistake falls fairly and squarely within the Kleinwort Benson principle. As Lord Goff says (ibid. p.379G-H):

“The payer believed, when he paid the money, that he was bound in law to pay it. He is now told that, on the law as held to be applicable at the date of the payment, he was not bound to pay it. Plainly, therefore, he paid the money under a mistake of law, and accordingly, subject to any applicable defences, he is entitled to recover it.”

The section 32(1)(c) issues

As to the discovery of the mistake, I respectfully agree with the judge’s conclusion (in paragraph 30 of his judgment, quoted in paragraph 138 above) that the mistake was not discovered until the ECJ delivered its judgment in Metallgesellschaft.

As to Lord Hope’s observations in Kleinwort Benson (at p.410B-C, quoted in paragraph 100 above) that a state of doubt is different from that of mistake, and that a person who pays when in doubt takes the risk that he may be wrong, I accept Mr Rabinowitz’ submission (see paragraph 175 above) that mere knowledge that the statutory provisions in question are under challenge is not to be equated with a state of doubt as to the validity of those provisions. In any event, as I have already pointed out, Mr Thomason’s evidence was that he was in no doubt that the ACT was payable, whatever the decision in Metallgesellschaft.

It follows that in my judgment, and in respectful agreement with the judge, all three payments in question were made under a mistake of law which was not discovered until the ECJ delivered its judgment in Metallgesellschaft.

The ‘settled law defence’ issue

I can deal with this issue shortly. I accept Mr Rabinowitz’ submission (see paragraph 183 above) that, as Lord Hoffmann concluded in Kleinwort Benson, the question whether or not the law should recognise a ‘settled law defence’ to a cause of action for mistake of law on the Kleinwort Benson principle is a question for Parliament. In any event, if and in so far as it is a question for the courts, in Kleinwort Benson itself Lord Goff declined to recognise such a defence.

The pleading issue

For reasons explained in Part III of this judgment, this issue remains a live issue in relation to the 1995 payment and the 1996 payment notwithstanding my conclusion on the cause of action issue.

I return, therefore, to the Particulars of Claim. As noted earlier, the only amendments are to the schedules to the Particulars of Claim: no amendments have been made to the body of the pleading.

Paragraphs 1 to 3 of the Particulars of Claim describe DMG and structure of the group of which it is a member. Paragraphs 4 and 5 plead the relevant statutory provisions. Paragraphs 6 and 7 plead that the statutory provisions were at all material times discriminatory, contrary to Articles 6, 52 and 58 of the EC Treaty. Paragraph 7 pleads that the statutory provisions were accordingly at all material times unlawful.

Paragraphs 9 to 12 of the Particulars of Claim plead as follows:

“9.

From time to time the Claimant paid dividends to DBAG (“the DBAG Dividends”). Pursuant to the unlawful Statutory Provisions and to unlawful demands made by the First and/or Second Defendant and further and/or alternatively under a mistake of law as to the validity of the Statutory Provisions, the Claimant paid to the First Defendant ACT in respect of the DBAG dividends. Such amounts include, but are not limited to, payments of ACT made by the Claimant as specified in the First Schedule hereto.

10.

Such payments were received by the First Defendant and/or the Second Defendant to the use of the Claimant.

11.

From time to time the Claimant paid dividends to DBI (“the DBI Dividends”), which in turn paid the DBI Dividends to DBAG. Pursuant to the Statutory Provisions, the Claimant paid to the First Defendant ACT in respect of the DBI Dividends. Such amounts include, but are not limited to, payments of ACT made by the Claimant as specified in the Second Schedule hereto.

12.

The DBAG Dividends and the DBI Dividends are hereinafter referred to together as “the Dividends”.

Then, under the heading “Restitution and Compensation”, paragraph 13 pleads as follows:

“13.

By reason of the matters pleaded above, the Claimant is entitled to and claims against the Defendants and each of them restitution of, and further and/or alternatively compensation for the loss of use of, monies paid on account of ACT pursuant to unlawful demands by the First and/or Second Defendant and/or under a mistake of law and pursuant to the Statutory Provisions in respect of the DBAG Dividends. Compensation for loss of use of monies to be calculated from the dates of payment until set-off against mainstream corporation tax or other payment or utilisation.”

Paragraphs 17 to 21 of the Particulars of Claim plead loss and damage. As noted earlier (see paragraph 10 above), the particulars of loss and damage pleaded under paragraph 20 of the Particulars of Claim contains (in subparagraph (B)) a claim for compensation for loss of use of the ACT during the period specified in paragraph 13.

On that basis, DMG claims restitution and compensation, in addition to damages for breach of duty.

Rule 17.1 of the Civil Procedure Rules (“CPR”) provides that once a statement of case has been served it may be amended only with the written consent of the parties or with the permission of the court. CPR 17.4 applies to amendments to a statement of case after the end of a relevant limitation period. CPR 17.4(2) provides as follows:

“The court may allow an amendment whose effect will be to add or substitute a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings.”

The issue, therefore, is whether the amendments to the schedules to include particulars of the 1995 payment and the 1996 payment had the effect of adding new claims; for if that was their effect, then for limitation purposes the new claims were not brought until the amendments were made, and it would follow that in the light of my conclusion on the cause of action issue the 1995 payment and the 1996 payment (in addition to the 1993 payment) were statute-barred.

In my judgment, however, on its true interpretation the Particulars of Claim plead claims in respect of all payments of ACT made by DMG under the statutory provisions in question, the function of the schedules being merely to supply particulars of the specific payments. This follows, in my judgment, from the statements in paragraphs 9 and 11 that the claims “include, but are not limited to” the payments specified in the schedules. It may well be that, when served with a pleading in that form, the appellants could have complained that it was embarrassing. In the event, however, no objection was taken at the time to the form of the pleading, just as no objection was taken to the fact that it includes a restitutionary claim which finds no mention in the claim form.

I accordingly agree with the judge that the claims in respect of all three of the payments in question were brought when the claim form was issued (13 October 2000).

The result, given my conclusions on the cause of action issue and the pleading issue, is that the claim in relation to the 1993 payment is statute-barred, but that the claims in relation to the 1995 payment and the 1996 payment are not. I would accordingly allow the appeal in relation to the 1993 payment, but dismiss it in relation to the 1995 payment and the 1996 payment.

On the cause of action issue, I agree with the judgments of Lord Justice Jonathan Parker and Lord Justice Buxton. On the pleading issue, on which my Lords have differed, I respectfully prefer the approach of Lord Justice Jonathan Parker.

I gratefully adopt my Lords’ exposition of the facts and the authorities, which make it unnecessary for me to repeat that exercise.

I agree with Lord Justice Buxton that in a claim for restitution each payment the return of which is claimed constitutes a separate cause of action, so that a claim which has been advanced within time in respect of one payment will not validate a claim in respect of other earlier payments where limitation has already run; nor will it validate an attempt to amend a claim form out of time in respect of further payments not so far pleaded. In this respect, Lord Justice Jonathan Parker’s approach to this issue is no different: see para 246 above.

However, the particular problem which has arisen is of a lower order of abstraction. It is in truth a narrow pleading point which has arisen on very special facts relating to the state of the pleadings in this case. The circumstances have been set out in Lord Justice Jonathan Parker’s judgment at paras 10 and 239/243 above. Like him (and the parties) I ignore the fact that restitution was never claimed in the claim form itself, but only in the particulars of claim. In form the claim form should have been amended, but perhaps because there is no critical difference between the date of the claim form on 13 October 2000 and the date of the particulars of claim on 9 February 2001 the absence of a claim for restitution from the claim form itself has passed without remark. As for the particulars of claim, the essential facts are that in their original form they claimed restitution, quite generally, of “Dividends” which were defined as amounts which “include, but are not limited to” the payments specified in the First and Second Schedules; and in their later amended form those Schedules were expanded to refer to the disputed payments in 1995 and 1996. The question is whether the particularisation in the original Schedules of only a limited number of a more general class expressly pleaded in the main body of the pleading means that the later extension of the amended Schedules to other payments within the general class lies outside the jurisdiction allowed for amendments once the relevant limitation period has expired.

Section 35 of the Limitation Act 1980 provides:

“(1)

For the purposes of this Act, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced –

…(b) in the case of any other new claim, on the same date as the original action…

(2)

In this section a new claim means…any claim involving either

(a)

the addition or substitution of a new cause of action…

(3)

Except as provided by section 33 of this Act or by rules of court, neither the High Court nor any county court shall allow a new claim within subsection (1)(b) above, other an original set-off or counterclaim, to be made in the course of any action after the expiry of any time limit under this Act which would affect a new action to enforce that claim.

(4)

Rules of court may provide for allowing a new claim to which subsection (3) applies to be made as there mentioned, but only if the conditions specified in subsection (5) below are satisfied, and subject to any further restrictions the rules may impose.

(5)

The conditions referred to in subsection (4) above are the following –

(a)

in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as are already in issue on any claim previously made in the original action…”

Pursuant to section 35, CPR 17.4(2) provides:

“The court may allow an amendment whose effect will be to add or substitute a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings.”

Park J, describing the current issue as “a fine point on the small print wording of the particulars of claim” expressed the view (at paras 34, 35 and 38) that the original form of the particulars of claim (“include but are not limited to”) meant that relief was claimed in respect of all dividend payments not limited to the payments specified in the original Schedules. The amendments therefore “did not plead a new cause of action, but rather gave further factual details of a cause or causes of action which had already been pleaded” (at para 38). Lord Justice Jonathan Parker is of the same view (at para 248 above), and so am I. On this basis, there is no need to ask whether the claims for relief in respect of the additional scheduled payments are “new claims”, nor whether, if they were, they would arise out of the same facts or substantially the same facts as already pleaded.

Lord Justice Buxton differs in his view, apparently on the basis that the particulars of claim (together with the original Schedules) had not adequately or sufficiently pleaded the additional payments. That, however, must in my judgment ultimately be a matter of degree. I would be reluctant to hold that a claim form which sufficiently identified the cause or causes of action sued upon would fail in its purpose because of some lack of particularity. In the present case, the payments in question were identified as dividends paid “from time to time” pursuant to unlawful statutory provisions and demands. It was in the nature of the pleading that there could be no intention to include some such payments but not others. If there had been no schedules identifying specific payments, then no doubt the pleading would refer to all such dividend payments described. Such a pleading may have lacked proper particularisation of dates and amounts, but I would not describe it as lacking in all effect. In other circumstances the original schedules might have been interpreted as deliberately excluding any dividend payments not particularised in them, but such an intention could hardly be taken from the language “include but are not limited to”.

Thus, in a case where an allegation in the statement of claim had not been pursued in further and better particulars, it was permissible as a matter of discretion by amendment of the particulars after the expiry of the limitation period to resuscitate the allegation without it being said that this amounted to a new cause of action: Burton v. MBC (Builders-Ashingdon) Ltd (1995) 69 P&CR 496 (CA). And in another case it was held that a statement of claim which originally disclosed no sustainable cause of action (thus a strong example) might in a proper case be amended with leave of the court despite the expiry of the limitation period so that a cause of action based on the same or substantially the same facts could be introduced: Sion v. Hampstead Health Authority [1994] 5 Med LR 170 (CA). In my judgment these examples support the view which Park J, Lord Justice Jonathan Parker and I have taken on this issue.

Finally, even if the amendments to the Schedules to particularise additional payments did amount to the introduction of new causes of action, I would regard it as a possible conclusion, particularly in the light of the original pleading “include but are not limited to”, that such further payments arise out of the same or substantially the same facts. That conclusion was not investigated in the judgment below, but it was a submission made on appeal. In my judgment, it is not necessary to reach this submission, but I would not wish it to be thought that it could not provide a feasible and legitimate answer to the problem raised by the issue under discussion.

For my part, therefore, I would agree that whether one looks to the claim form itself or to the particulars of claim the claims in respect of the 1995 and 1996 payments were brought within time.

I agree with my Lords’ cogent analysis in this respect. Where a tax payment has been exacted by an unlawful ultra vires demand, as in this case, the applicable cause of action is the Woolwich cause of action, as of right as a matter of high constitutional principle, in which mistake of law, whether it occurs or not (and in Woolwich it did not occur), is irrelevant. Otherwise, mistake of law in the context of payment of taxes is only relevant to the extent that it has a possible role to play within the applicable statutory provisions. The rules of recovery in private law transactions, however, in as much as they are based on mistake of fact or law, are governed by different principles and fall under a “separate and distinct” regime.

Lord Justice Jonathan Parker has dealt with these issues only briefly, for they do not arise and he therefore approached them on the hypothetical basis that he was wrong to say that the Kleinwort regime was inapplicable. It followed that he had to apply the facts of this case in an inappropriate context. In this respect, I would prefer myself to underline the observations of Lord Justice Buxton at paras 279/284 below. I find it very difficult to reconcile the judge’s conclusion, that the respondents were still labouring under their mistake of law until the judgment of the Court of Justice had been delivered, with Lord Hope’s remarks in Kleinwort at 410B and 412C: and see now Brennan v Bolt Burdon (a firm) [2004] EWCA Civ 1017, [2004] 3 WLR 1321.

In sum, I agree with Lord Justice Jonathan Parker that the appeal should be allowed in relation to the 1993 payment, where the respondents’ claim was time barred, but dismissed in relation to the 1995 and 1996 payments, where their claims were not out of time.

Because we are differing from the judge, and also because on the pleading issue I have the misfortune to take a view different from that of my Lords, I venture to add some words of my own. In dealing with the substance of the appeal I address only the “cause of action” issue, as identified by Jonathan Parker LJ in paragraph 26.A of his judgment.

I have warned myself against treating Lord Goff’s speeches in Woolwich Equitable Building Society [1993] AC 70 [Woolwich] and in Kleinwort as if they were statutes. At the same time, however, these speeches are no ordinary judgments. In both cases the leading authority in a particular area of the law set himself to explain developments in that law that were acknowledged to be of general significance and which, before those cases, had been feared to be beyond the reach of judicial as opposed to legislative intervention: in Woolwich, the recovery of money paid under an ultra vires demand; in Kleinwort, the recovery of money paid under a mistake of law. In both cases Lord Goff explained the departures from the position as it had been understood up to then by detailed and careful analysis, which is plainly intended to set out the whole of the relevant law in effectively canonical terms. And the speeches were seen as such by other members of the House of Lords: see, in Kleinwort, Lord Browne-Wilkinson at p357F and Lord Hoffmann at p398C.

It is therefore tempting to say that when, in the famous passage at p382C-E in Kleinwort, Lord Goff said that recovery of payments made under an ultra vires demand fell under a separate and distinct regime from payments made under private transactions involving a mistake of fact or law of the kind addressed in Kleinwort; he really did mean separate and distinct; and that that is the end of this case. But that simple approach would not do justice either to the judgment of the judge or to the arguments addressed to us. Nor would it dispell what appear to be lingering concerns that Lord Goff would not have intended the outcome of his observations that is asserted by the revenue in this case. It is therefore necessary to address the matter in much more detail.

I will proceed as follows. First, I address the development of the law that occurred in Woolwich, to demonstrate that that law was intended to form a complete code in relation to recovery of ultra vires payments by use of the common law rather than under statute. That does not of itself determine the issue before us, but it does serve to explain why Lord Goff spoke as he did in Kleinwort. Second, and following on from the analysis of Woolwich, I consider the context in which Lord Goff referred to the Woolwich rule in Kleinwort, to demonstrate that not only did Lord Goff think that Woolwich recovery was the only remedy for ultra vires payments; but also, on the other side of the coin, that such payments were amenable only to recovery under the Woolwich rule and not under the rubric of payments under a mistake. Third, I demonstrate that that conclusion is in any event strongly reinforced by the difficulty of fitting a case of ultra vires payments, such as the present, into the language of and rules applying to recovery on grounds of mistake. Fourth, I address certain other considerations that were relied on in the course of argument.

In paragraphs 269-274 of this judgment unless otherwise stated page references are to the report at [1993] AC 70.

Lord Goff recognised that the law of restitution, as it stood in 1992, was limited in the relief that it gave to persons who had paid an ultra vires tax. Recovery was available when a payment was made under a mistake of fact, though not of law: p164D. And payments were recoverable when made under “compulsion”; but, at least in the then state of English law, that concept did not extend to the act of paying simply in order to obey what was thought to be the law: p173E. It was necessary to rely on these particular and limited rights of recovery because English law did not recognise a general action for the recovery of money on the ground that it was not due, along the lines of the condictio indebiti that had been developed in other systems: p172D.

Lord Goff went on from his observation that English law gave no general right of recovery to explain that what was being sought in Woolwich was in a sense a reversal of that position “in a particular type of case”: p172D. And the justification for that step was not any deduction from or development of the existing rules of restitution, but a combination of common justice; the constitutional principle that taxes should not be levied without Parliamentary approval; and the need to protect the citizen against the power of the state. He said, at p172B-G:

“Take any tax or duty paid by the citizen pursuant to an unlawful demand. Common justice seems to require that tax to be repaid, unless special circumstances or some principle of policy require otherwise; prima facie, the taxpayer should be entitled to repayment as of right…..it is one of the most fundamental principles of our law-enshrined in a famous constitutional document, the Bill of Rights 1688-that taxes should not be levied without the authority of Parliament; and full effect can only be given to that principle if the return of taxes exacted under an unlawful demand can be enforced as a matter of right…….when the revenue makes a demand for tax, that demand is implicitly backed by the coercive powers of the state”

This was therefore a new remedy, perhaps drawing upon, but certainly not directly applying, ordinary principles of restitution, and having as its basis and justification the particular nature of an ultra vires demand for tax. The distance between this remedy and restitution as understood in private law can be demonstrated by a number of the characteristics of recovery on the basis of an ultra vires demand that were identified in Woolwich:

It is therefore difficult to escape the conclusion that in Woolwich the House of Lords recognised, or created, a right and a remedy that were specific to the particular circumstances of the demander and of the payer, and which stood outside the main stream of restitution as understood in a private law context.

It is also difficult to escape the conclusion that that remedy was seen by Lord Goff to be the sole remedy available in respect of a payment under an ultra vires demand. As already noted, before Woolwich the sole grounds of relief were thought to be based on mistake of fact or on compulsion: see paragraph 6 above. The strong tide of jurisprudence flowing in favour of recognising relief also in cases of mistake of law was already very apparent: see p 164E-F. But Lord Goff did not see that as an appropriate route through which to found relief in cases of ultra vires payments: not merely because in some such cases, of which Woolwich itself was one, no mistake had been made by the payer, but more fundamentally because issues of mistake on the part of the payer were seen as simply irrelevant to claims based on unlawful action on the part of the revenue. As Lord Goff said at p176D:

“if there is to be a right to recovery in respect of taxes exacted unlawfully by the revenue, it is irrelevant to consider whether the old rule barring recovery of money paid under mistake of law should be abolished, for that rule can have no application where the remedy arises not from error on the part of the taxpayer, but from the unlawful nature of the demand by the revenue”

Woolwich thus provides a complete code to address recovery of payments under ultra vires demands.

Finally in analysing Woolwich I must acknowledge (I hope that it is not disrespectful to say, by way of a footnote) that in the last of his many major contributions to the law of restitution before his untimely death Professor Peter Birks suggested that, had the Woolwich problem been addressed after the “swaps” cases, and in the light of their jurisprudence, it would have been clear that the case fell entirely consistently within the same rules of restitution as were subsequently applied in those swap cases: Unjust Enrichment (Second Edition, 2005) p134. I find it difficult to share that view, in the light of the actual exposition in Woolwich as set out above. And the commonality that Professor Birks sees between recovery of ultra vires payments and restitutionary recovery in other cases springs from the view that all of them rest on recovery on the single ground of “absence of basis”: ibid, p134. That argument was not adopted before us, and understandably so. That was because it is essential to the respondents’ case, applying Kleinwort, to stress that recovery was achieved in that case on the basis of mistake: so as to attract the period of limitation envisaged by section 32(1)(c) rather than the six years to which restitutionary claims generally are restricted. That last aspect of Kleinwort was equally stressed in the case itself by Lord Hope of Craighead. Having, at p415, referred to Sandwell [1994] 4 All ER 890 and Guinness Mahon v Kensington and Chelsea LBC [1999] QB 215 (cases that as Professor Birks emphasised, op. cit. p110, were decided on absence or failure of basis) Lord Hope continued, at p415H, to point out that those cases did not assist because they had not been decided on the ground of mistake, which was the ground on which the bank had to rely in order to meet the local authorities’ limitation defence.

In paragraphs 276-278 of this judgment page references, unless otherwise stated, are to the report at [1999] 2 AC 349.

The respondents urged that we should look carefully at the point in Lord Goff’s speech at which his observation was made, and at his reason for making it. The judge also thought that to be of importance: see paragraph 18(ii) of his judgment. I respectfully agree. From p381B onwards Lord Goff was considering, in the context of his adoption of the declaratory theory of judicial decision, whether there should be recognised a defence of payment under a settled understanding of law, as was recommended by the Law Commission in clause 3(1) of the draft Bill annexed to its report on Restitution: Mistakes of Law (Law Com No 227, 1994): see pp 376H-377A. It was in order to address that issue that Lord Goff, at p381G, considered that it was

“appropriate to draw a distinction between, on the one hand, payments of taxes and other similar charges and, on the other hand, payments made under ordinary private transactions”

Lord Goff drew that distinction because he considered that the arguments in favour of a defence of payment under a settled understanding of the law applied differently in the two cases. “In cases concerned with overpaid taxes a case can be made” (p 382D) for the existence of such a defence; for somewhat the same reasons as had led Lord Goff in Woolwich to contemplate strict time-limits for claims in ultra vires cases: see paragraph 7(iii) above. But no such case could be made in respect of payments under private transactions, where the element of public interest is lacking: see p 382F. It is therefore entirely clear that Lord Goff regarded the contrast that he underlined between the two separate and distinct regimes as essential to the development of his argument. Not only the language used but also the structure of this part of the judgment demonstrates that Lord Goff’s analysis of the two separate streams of relief was regarded by him as setting out the substantive law that pointed to a particular solution to the issue of the settled law defence.

It follows that I am unable to accept the argument of the respondents that the crucial part of Lord Goff’s judgment is in some way limited in its generality because it occurs during a discussion of the settled law defence. It occurred there precisely because Lord Goff needed to set out the general structure of the law before identifying the different effect of the arguments about the settled law defence as applied to one chapter of the law and to the other. It also follows that I am unable to adopt the view of the judge, in his paragraph 18(ii), that if Lord Goff had intended to lay down a contrast between recoverability of money generally paid under a mistake of law and recoverability of money paid in taxes under a mistake of law, he would not have waited to do so until this stage in his speech. In the earlier parts of his speech Lord Goff was concerned to demonstrate, in considerable detail, the current throughout the world towards recognising mistake of law as a ground of restitutionary recovery. Lord Goff did not need at that stage to address the position with regard to ultra vires payments because, as indicated in paragraph 10 above, he thought that “mistake” and recovery on the ground of ultra vires demand were two quite separate institutions. The latter ground of recovery only needed to come into the reckoning when Lord Goff explained how it was that arguments that potentially supported a defence of payment under settled law in the case of ultra vires demands could not apply in the case of payments made under a mistake, be it of fact or of law.

Lord Goff having held that issues of mistake are irrelevant in ultra vires cases (see paragraph 9 above); and having done so in a speech that commanded the assent of the majority of their Lordships in Woolwich; it may appear supererogatory to seek to demonstrate why, with great respect, that view is plainly well-founded. I do so only because, as the argument developed in this appeal, it became increasingly apparent that the considerations that lead to recovery in a case of an ultra vires demand can only with the greatest difficulty be fitted into the rules governing recovery on grounds of mistake.

First, as we have already seen (see paragraph 270(ii) above), the “defences” available to a claim for restitution on grounds of mistake may well not be available in a Woolwich case. If, as the respondents argue in the present case, any claim in respect of an ultra vires demand where a “mistake” can be said to have been made by the payer can also be pursued under the latter rubric, then that presumably attracts the whole of the law attaching to recovery on grounds of mistake, however difficult it may be to apply. That in turn severely undermines the principle strongly stated in Woolwich that recovery should be as of right, to the extent that Lord Goff expressed doubts as to whether even a defence that the plaintiff had passed on the tax or levy should be available: see Woolwich at pp 177H-178A. And the difficulty of applying the normal restitution defences to a right based simply on an ultra vires demand is cogently demonstrated by Professor Gareth Jones in Goff and Jones (5^th edition), pp 675-677.

Second, the “mistake” on which recovery depends in a case like Kleinwort is a mistake as to the rights of the opposite party in a private law transaction. But it must be an actual mistake as to those rights, and not just uncertainty as to their existence; and it must be that mistake that causes the payment to be made. Those requirements are set out by Lord Hope of Craighead in Kleinwort at pp 408-412:

“[408A] it will not be enough for the payer to prove that he made a mistake. He must prove that he would not have made the payment had he known of the mistake at the time when it was made…[410B] A state of doubt is different from that of mistake. A person who pays when in doubt takes the risk that he may be wrong…..[412C] A payment made in the knowledge that there was a ground to contest liability will be irrecoverable”

Those considerations can only be applied very imperfectly to a citizen faced with an ultra vires demand. Take this very case. The judge, in his paragraph 27, quoted the evidence as to the respondents’ reasons for making the payments of their Head of Taxation, Mr Thomason:

“[A]t all times prior to the determination of the European Court in the Metallgesellschaft case, I believed that the UK statute denying the ability of make a group income election was the law and I was bound to act in accordance with this law….It did not occur to me that I could ignore the law as it stood for the simple reason that the law is the law. Just because another taxpayer challenged the law that did not mean that I could or should ignore it.”

The judge found that that the respondents did not become aware that section 247 of the 1988 Act was unenforceable in Community law until judgment had been delivered in the Court of Justice: and that any payments made before that date were indeed made under a relevant and operative mistake. That conclusion may be difficult to reconcile with at least the latter part of Lord Hope’s analysis set out in paragraph 281 above. The more general point, however, is that persons who pay in response to a demand by the revenue are in a quite different position from persons who pay under a private transaction. The demand for tax is implicitly backed by the coercive powers of the state, as Lord Goff emphasised at p 172F in Woolwich, see paragraph 270 above. That consideration lay behind the view expressed by Mr Thomason. That consideration, allied to the public nature of the responsibility, caused Lord Goff to think, at p 176D in Woolwich, see paragraph 272 above, that the taxpayer’s opinion as to the content of the law was irrelevant.

It is thus not possible sensibly to apply Lord Hope’s analysis of the nature of the mistake that grounds recovery to a case of payment under an ultra vires demand. And to attempt to do so produces the very remarkable outcome asserted in the present case. Both the Woolwich Equitable Building Society and the present respondents paid under claims made by public authorities. In each case the cost of not paying, both in terms of litigation and in terms of public exposure, would have been significant. Woolwich was certain, as it turned out correctly, that the demand was indeed ultra vires, but paid nonetheless. The present respondents were aware of the doubts raised by other persons, and indeed of pending litigation, but either formed no concluded view about the issue, or as Mr Thomason suggests paid because they thought, as it turned out incorrectly, that the law was the law. On the basis of these two states of mind, the respondents claim relief because of payment under a mistake, whilst Woolwich is restricted to a claim with a six year limitation period because, as Lord Goff pointed out in Kleinwort, it had made no mistake.

I do not introduce this comparison to argue matters of fairness. Rather, the comparison demonstrates the ineptitude of seeking to address cases the vice of which turns on the making of an ultra vires demand by a public authority through machinery developed to deal with the quite different issues that arise when a citizen makes a private law payment under a mistake that is indeed his own mistake.

In the course of a comparative exercise demonstrating that the rule excluding recovery for mistakes of law had been abandoned in other jurisdictions Lord Goff referred to two cases that involved payments to the revenue: in South Africa Willis Faber Enthoven (Pty) Ltd v Receiver of Revenue 1992 (4) SA 202; and in Australia Commissioner of State Revenue v Royal Insurance Australia Ltd (1994) 182 CLR 51. Mr Rabinowitz argued strongly that that demonstrated that Lord Goff saw no distinction between revenue and non-revenue cases when dealing with the jurisdiction in mistake. The judge adopted a similar argument in respect of the reference to Willis Faber: see his paragraph 18(v).

The reference to Commissioner of State Revenue does not assist in this connexion. Lord Goff cited the case only to correct a dictum of Mason CJ about what had been decided in Woolwich: see [1999] 2 AC at p 375B. Willis Faber was not subjected to any detailed analysis by Lord Goff. In any such analysis I have little doubt that Lord Goff would have pointed out that the basis of recovery in Roman-Dutch law is the condictio indebiti: which, as Hefer JA put it at p220H, “has since Roman times always been regarded as a remedy ex aequo et bono to prevent one person being unjustifiably enriched at the expense of another”. That is the general remedy for recovery of money on the simple ground that it was not due that, as Lord Goff had explained at p 172D in Woolwich, English law had decided not to adopt: see paragraph 269 above. The condictio does not rest on the mistake, but rather on the effect of the mistake. So, as Hefer JA went on to point out, “where such a payment is made in error, it matters not whether the error is one of fact or of law: in either case it remains the payment of an indebitum and, if not repaid, the receiver remains enriched”. Willis Faber thus addresses a system of law with a basis different from that explained by Lord Goff in Woolwich. It is quite impossible to spell out of his passing reference to the case a conclusion that conflicts with the specific language used everywhere else in his speech.

The rules as to group income election are invalid because they infringe article 43 (ex article 52) of the Treaty establishing the European Community. The national state is therefore obliged to provide a remedy, in the shape of restitution of charges, but according to the rules of the domestic legal system and subject to the procedural rules of that system: Joined Cases C-397/98 and C-410/98, Metallgesellschaft, at paragraph 85. The only restriction on the reach of those domestic rules is that they must not make the exercise of the Community right practically impossible or excessively difficult. The domestic rules that fall under this rubric include rules as to time-limits: Case C-261/95 [1997] ECR I-4025 (Palmisani). A remedy is provided for the wrongful acceleration of payment of tax in the present case under the Woolwich principle. It was not suggested, nor could it have been, that the limitation rules attaching to that principle made the exercise of the Community right practically impossible or excessively difficult. The remedy therefore conforms to this country’s obligations in Community law.

Mr Rabinowitz argued that, even if the Woolwich and Kleinwort remedies were separate and distinct, that created nothing more than alternative causes of action in respect of payment under an ultra vires demand, between which the claimant could choose as suited him: just as, for instance, the same facts might ground a claim either in nuisance or in negligence. That approach does not give weight either to the exclusive nature of the remedy created in Woolwich or to the difficulty of applying the rules as to mistake of law to a payment under an ultra vires demand. Nor does it respect the language that described the two remedies as separate and distinct.

There is however a further reason why this argument is ill-founded. Where there are alternative causes of action in tort, they are nonetheless both based on the same damage or loss suffered by the claimant. As Lord Hobhouse said in Platform Homes v Oyston Shipways [2000] 2 AC 190 at p209A, citing the headnote in the official report of The Wagon Mound, in the case of claims in tort it is not the act but the consequences on which tortious liability is founded. But restitutionary claims have a different structure, because they are indeed founded on an act, the act of payment. In Woolwich “the subject who make a payment in response to an unlawful demand of tax acquires forthwith a prima facie right in restitution to the repayment of the money”: per Lord Goff at p 171F. In Kleinwort, “It is well established that the cause of action for the recovery of money paid under a mistake of fact accrues at the time of payment”: per Lord Goff at p 386F, a passage considered further in paragraph 292 below. Whether the payer has in consequence suffered loss does not enter into consideration when determining the constitution of the action. Loss, or rather lack thereof, is only relevant as a matter of defence; and quite possibly, in Woolwich, not even then: see paragraphs 270(ii) and 280 above. In the absence in English law of a general right to recovery (see paragraph 270 above), the claims turn on the reason why in law that payment should be returned. But that reason is completely different in the case of Woolwich on the one hand and of Kleinwort on the other. In Woolwich it is payment under an unlawful demand. In Kleinwort it is payment by mistake of the type and for the reasons described by Lord Hope: see paragraphs 281-283 above.

This contrast is quite different from the comparison that is appropriate in a case where the claimant bases his claim on an allegation that the defendant has caused him loss, and has more than one ground upon which he can assert that the defendant’s conduct in causing that loss was unlawful. The difficulty of fitting into the requirements for a mistake by the payer that are laid out in Kleinwort a case, such as Woolwich, where the right to repayment is based on the nature of the demand only serves further to underline the ineptitude of seeking to apply the jurisprudence of mistake to the separate and distinct regime that controls ultra vires conduct by public authorities.

In Woolwich Lord Goff, with the concurrence of the majority of the House, crafted a carefully designed and limited remedy to address the specific problem of ultra vires demands. He recognised that it might be necessary to limit the ambit of recovery of right against public funds, for instance by the introduction of specific time-limits. He emphasised that the remedy turned on the nature of the demand, and not on any mistake by the payer. Quite apart from the language used in Kleinwort, it is wholly implausible that Lord Goff in that case envisaged that the same problem could be addressed by a remedy with much more extensive time-limits and formulated entirely in terms of mistake by the payer. It is not open to the claimants in this case to adopt the remedy in terms of mistake of law that was introduced for private law cases in Kleinwort.

This issue is described and addressed by Jonathan Parker LJ in paragraphs 26.E and 238-248 of his judgment. I have respectfully to disagree with the conclusion that he reaches. I do so because I do not think that that conclusion, and the argument of the respondents that supports it, properly recognises the essential nature of a claim in restitution, and what has to be proved to establish such a claim, such as I have already ventured to refer to in paragraphs 289-290 above.

In Kleinwort Lord Goff said, at p386F:

“It is well established that the cause of action for the recovery of money paid under a mistake of fact accrues at the time of payment. As authority for this proposition it is usual to cite Baker v Courage & Co [1910] 1 KB 56, a decision of Hamilton J (later Lord Sumner) which, so far as I am aware, has never been questioned”

Baker v Courage, which was a limitation case, was referred to in the same sense by Lord Hope of Craighead at p 409E. Hamilton J’s analysis extended to all cases of the action for money had and received: see [1910] 1 KB at p65. It is a claim of that nature that the respondents assert. That claim depends on, and is constituted by, the fact of the payment: see paragraph 26 above. It therefore follows, as Lord Goff went on to hold at p386G, that where there is a series of payments

“the cause of action for the recovery of the money so paid will accrue, in respect of each payment, on the date when the payment was made”

And it follows from that that a claim in restitution is not sufficiently pleaded unless it asserts the payment on which it rests: because until it does that it fails (in the classic words of Brett J in Cooke v Gill (1873) LR 8 CP 107 at p116, cited with approval by this court in Paragon Finance v Thakerar [1999] 1 All ER 400 at p 405d) to plead every fact which is material to be proved to entitle the plaintiff to succeed. Indeed, the fact of the payment is not merely material to success, but the whole essence of the action.

I of course take note of the fact that the claim in the present case is not for recovery of the actual sums paid, but for compensation for premature payment: see paragraph 269 above. But the case has been argued throughout as an orthodox exercise in restitution; and in any event the respondents cannot make good, and by their pleading accept that they cannot make good, any claim for compensation unless they first establish the fact and date of the payment. For the reasons already given, each such payment creates a new cause of action; and therefore the amendments seeking to assert further payments added new causes of action, causes of action that on the above principles were out of time if the amendment was made out of time.

Mr Rabinowitz argued against that conclusion, and I understand my Lords to accept, that this case was no different from a claim in tort, where new factual allegations may be added without constituting a new cause of action. That of course depends on the nature of the new factual allegations: see the judgment in Paragon at p406c. But, more fundamentally, the essence of a claim in tort is of tortious conduct causing loss. It may therefore be sufficient to plead the tortious conduct as the foundation of the action, causing unspecified loss, with subsequent particularisation of the loss merely filling out an already sufficiently pleaded claim. That indeed is the approach adopted in paragraphs 9 and 11 of the particulars of claim in this case. But in a claim for restitution the essence of the claim is the fact of the payment, with the reasons for that payment serving to assert why that payment should be returned: see paragraph 288 above. Both elements in the cause of action must thus be pleaded, under the general principle of Cooke v Gill.

I would therefore hold that amendments made to add to the claim payments made more than six years before the date of the amendment are statute-barred.

The claimants are restricted to relief under the Woolwich principle and to the six-year limitation period that is agreed to apply to that relief. In my view, all of the payments in respect of which claims are made fell outside that limitation period: the 1993 payment because it was made more than six years before the date of the writ, and the 1995 and 1996 payments because they were added by amendment made more than six years after the date of the payment. I would have allowed the appeal in those terms. However, since my Lords are of a different mind in relation to the pleading point the appeal will be allowed only to the extent set out by Jonathan Parker LJ in paragraph 249 of his judgment.

The Appellants’ appeal in relation to the “1993 payment” (as defined in paragraph 9 of the Judgment of Lord Justice Jonathan Parker) is allowed.

The Appellants’ appeal in relation to the “1995” and “1996 payments” (as defined in paragraph 9 of the Judgment of Lord Justice Jonathan Parker) is dismissed.

The Respondent has leave to appeal to the House of Lords on the “cause of action” issue (as defined in paragraph 26A. of the Judgment of Lord Justice Jonathan Parker).

The Appellants have leave to appeal to the House of Lords on the “pleading issue” (as defined in Paragraph 26E. of the Judgment of Lord Justice Jonathan Parker).

The Respondent do pay two-thirds of the Appellants’ costs both here and below (costs to be assessed if not agreed).

There be a stay of execution relating to the order for costs made at Paragraph 5 hereof until the later of ; (i) where no appeal is made to the House of Lords, the date on which the period for making such an appeal expires; or (ii) where an appeal is made to the House of Lords, the date of judgment.

Liberty to apply for both parties.