Amalgamated Metal Corporation Plc v Wragge & Co (A Firm) & Anor

The Claimant (“AMC”) is the holding company of a group of companies that is involved in the supply of raw materials and, in particular, in metals trading. Up until 2003, the Claimant was owned by Preussag AG (which changed its name in about 2003 to TUI AG), a German company which was, for all material purposes, its parent. In 2003 AMC was the subject of a management buyout.

The First Defendant was, at all material times, a firm of solicitors. The Second Defendant is a limited liability partnership that is the successor practice to the First Defendant. The First Defendant was for several years retained by AMC as its solicitors. Together they are referred to as “Wragge”.

The ACT Group Litigation was concerned with claims by UK companies that had paid advance corporation tax (“ACT”) on dividends paid to non-resident parent companies. UK companies with UK-resident parent companies could avoid the payment of ACT by making a group income election. This was not open to UK companies with a non-resident parent company. In the Metallgesellschaft decision (Footnote: ¹) the European Court of Justice decided that these arrangements infringed EU law and that UK companies that had been unlawfully required to pay ACT were entitled to compensation.

Following the decision of the European Court of Justice, the ACT Group Litigation proceeded through the English Courts and a series of issues arose as to the entitlement of the claimant companies as against the Revenue (“HMRC”). These claims concerned the ACT paid on dividends to non- resident parent companies (“relevant ACT”). (Footnote: ²) AMC instructed Wragge to act on its behalf in relation to the ACT Group Litigation and, in due course, AMC became a claimant in that group litigation. (Footnote: ³)

Like many of the claimants in the ACT Group Litigation, AMC had claims in respect of ACT that it had paid which were obviously not statute-barred and those in respect of losses which were incurred in excess of six years prior to the issue of the claim form. It also had claims in respect of both utilised ACT (being ACT that had later been used by setting it off against mainstream corporation tax (“MCT”) liabilities) and unutilised ACT (being ACT that had been paid but not yet used to discharge other tax liabilities).

One issue that arose in the ACT Group Litigation was as to the calculation of compensation and interest to which the claimants were entitled in respect of the relevant ACT that had been paid wrongfully. (Footnote: ⁴) On 15 April 2003 Wragge accepted an offer from HMRC to compromise AMC’s claims as to compensation and interest in respect of both the claims brought within 6 years and the pre-limitation claims, subject to AMC succeeding on the limitation issue as regards the latter. Pursuant to the settlement, interest was calculated on the basis of simple interest. In the event it was decided in a test case pursued by one of the claimants (Footnote: ⁵) that interest was calculable on a compound basis.

HMRC accepted that the settlement reached in 2003 did not compromise AMC’s pre-limitation claim in respect of unutilised ACT and AMC was able to present, and HMRC accepted, a claim for interest in respect of this ACT on a compound basis. Thus, AMC’s complaint focuses on its pre-limitation claim in respect of utilised ACT which was settled with HMRC on the basis of simple interest alone. AMC contends that it did not agree to, authorise or ratify this part of the settlement. AMC says that otherwise it would have remained subscribed to the Group Litigation on the issue of how pre-limitation losses should be calculated, and would therefore have been one of the claimants who succeeded in the House of Lords in the Sempra case in establishing that the losses in question were to be calculated on a compound interest basis.

AMC settled its claim with HMRC in respect of utilised ACT on the basis of simple interest and unutilised ACT on a compound interest basis for the sum of £9,413,279.81, of which £4,829,569.02 related to utilised ACT and £4,583,710.79 to unutilised ACT. AMC alleges that had compound interest been applied to its pre-limitation utilised ACT claim then its total claim against HMRC would have been £17,068,752.94 such that it has received £7,655,473.13 less than should have been the case.

There was an enormous quantity of documentary material incorporated into some 20 files concerning the period from 1998 to 2006. Only a very small proportion of this material was referred to during the trial. This documentary evidence was supplemented by oral evidence from a number of witnesses.

AMC called two witnesses:

Mr Victor Sher, Chief Executive of AMC and a member of the board of directors;

Mr Michael Hoffman, Taxation Manager of AMC.

Mr Sher gave his evidence in a clear and convincing manner. He had a good grasp of the documents and I felt confident that I could rely on his testimony. Wragge sought to undermine his credibility by suggesting that, with a view to taking advantage of AMC’s parent company during the negotiations for the management buy out, he concealed the scale of the claim against HMRC. I reject that contention. Indeed his agreement to allow Wragge to act for the parent company is wholly inconsistent with any such plan. The reality was that the full scale of the claim only emerged after the archives for the period more than 12 years back were unearthed.

Mr Hoffman was an important player in terms of preparing figures. His evidence was manifestly reliable. But the reality was that responsibility for the ACT claim below board level was that of Mr Derek Farmer, AMC’s General Counsel, to whom Mr Hoffman reported. He was the point of liaison with Wragge. No doubt if available, Mr Farmer would have been called but tragically he died in May 2006.

Wragge called three witnesses:

Ms Lara Young, an associate solicitor in the litigation department of Wragge from 2000 to 2005;

Mr Kevin Lowe, a partner of Wragge from May 1999 in the taxation department;

Ms Ann Benzimra, a partner from May 1999 until April 2004.

Ms Young gave the impression of being anxious to assist the court but I fear she sought to do so by way of reconstruction rather than recollection. Mr Lowe’s involvement was limited. I have little doubt that his evidence could be relied upon. Ms Benzimra did not pretend to have any significant recollection of events.

Nonetheless I must bear in mind that these witnesses were seeking to recall events which occurred many years earlier. It is accordingly another paradigm case for applying the following dictum of Lord Goff in Grace Shipping v. Sharp & Co [1987] 1 Lloyd's Law Rep. 207 at p. 215-6:

A proper appreciation of the overall probabilities, and of the possible motives of the participants, sufficient to resolve any fundamental conflict of evidence as to what took place orally between them, requires a quite detailed appreciation of the underlying background facts and some appreciation of subsequent events. It is therefore necessary for me to set out the detail of the written material at some length.

ACT, which was abolished in 1999, was corporation tax payable in advance of the date on which it would otherwise have been payable. A company resident in the United Kingdom pays corporation tax on profits arising in a given accounting period and, generally speaking, the tax was payable nine months after the period ended. A company which paid a dividend became liable to account to the HMRC for ACT calculated as a proportion of the dividend. This could afterwards be set off against the corporation tax (MCT) which became chargeable on its profits. HMRC thereby obtained early payment of the tax and, in cases in which the company’s liability for MCT turned out to be less than it had paid as ACT, payment of tax which would not otherwise have fallen due.

ACT which a company was later able to set-off against its liability for MCT is described as ‘utilised ACT’. When a company could not or did not set-off ACT against MCT (e.g. because it did not generate sufficient profits to give rise to a liability to MCT), that ACT is described as ‘unutilised ACT’ (or sometimes in the documents as ‘unrelieved’ ACT).

The rule that ACT was payable on dividends was however subject to an exception if the dividend was paid to a parent company in the same group. Under section 247 of the Income and Corporation Taxes Act 1988 (“ICTA 1988”) the company and its parent could jointly make a group income election which meant that the subsidiary did not have to pay ACT on dividends paid under the group income election to its parent.

But ICTA 1988 confined the right of election to cases in which the parent was resident in the United Kingdom. Accordingly, whilst a UK resident subsidiary of a UK resident parent could when paying a dividend, by means of the payment of the dividend under a group income election pursuant to section 247 of ICTA 1988, avoid the payment of ACT, a UK resident subsidiary of a non-resident parent could not do so. Accordingly, the UK resident subsidiary of a UK resident parent was in a better position as regards the payment of corporation tax than a UK resident subsidiary of a non-resident parent.

In the case of Metallgesellschaft Ltd v Inland Revenue Comrs and Hoechst AG v Inland Revenue Comrs (Joined Cases C-397 and 410/98) [2001] Ch 620, decided on 8 March 2001, the European Court of Justice decided that these arrangements infringed the right of establishment guaranteed by article 52 (now 43) of the EC Treaty in that they discriminated against UK resident companies with parent companies resident in other member states as compared to UK resident companies with UK parents. It held that the companies which had been unlawfully required to pay ACT were entitled to restitution or compensation. The nature of the remedies, the procedures by which they could be enforced and matters such as the appropriate limitation periods were said to be matters for domestic law.

Thus the Metallgesellschaft/Hoechst case left open the question of precisely how English law would compensate those who had been unlawfully required to pay ACT. Various group litigation orders were made to determine the ambit of such compensation. Broadly, it was apparent that the two main issues were going to be (a) the basis upon which compensation should be calculated for the loss of use of the money; and (b) the time period for which such a claim could be made.

On 28 June 2001 AMC wrote to HMRC claiming ‘repayment of all the unrelieved ACT and interest on all the ACT paid.’ On 19 September 2001 HMRC replied that it had received a number of High Court claims similar to the Hoechst and Metallgesellschaft cases, and listed the classes of claim which were to form a GLO as set out in an application made by HMRC to the High Court.

Following advice given to him by Mr Hoffman that the unrelieved ACT as regards AMC was as much as £75,000 for the previous six years and about £800,000 for the previous 12 years, Mr Farmer had an initial discussion on 22 November 2001 with Kevin Lowe of Wragge. On 26 November 2001 Mr Farmer had a further telephone conversation with Mr Lowe and also with Ms Young of Wragge. Advice was given by Wragge that the Claim Form needed to be issued as soon as possible due to the limitation period of 6 years.

General advice about the mechanics of Group Litigation was given, including the possibility that AMC’s contribution to the costs of such an action could be de minimis given the number of likely claimants. Mr Farmer’s note of this consultation also records:

On 26 November 2001 the Group Litigation Order in relation to the ACT claims was sealed in Chancery Division. The EU Issues were defined as follows:

Limitation

Can a Claimant’s claim properly be brought in restitution based on mistake of law as well as by way of a claim for damages (as the Defendants accept)? (Footnote: ⁶)

If the claim may properly be brought in restitution based on mistake of law, does the applicable limitation period for such a claim in restitution start to run from the date of the decision of the European Court of Justice in joined cases C-397/98 and C410/98 Metallgesellschaft Ltd and others (8 ^th March 2001) by reason of Section 32(1)(C) Limitation Act 1980? If not, from what date does the applicable limitation period start to run?

Quantum

Where an amount of ACT has been set off against a UK company’s corporation tax liability or has been surrendered to another group company or has been carried back and set off against the UK company’s corporation tax liability arising in an earlier year, at what rate and for what period and on what basis is interest due in calculating the damages and/or restitution in respect of the loss of use of the sum paid as ACT?

At what rate and for what period and on what basis is interest due on the amount calculated in accordance with (A) above?

Where a Claimant has surplus ACT which has not been utilised and if the Claimant is entitled to payment in compensation of a sum equivalent to such surplus ACT, plus further compensation to reflect the loss of use of that ACT, the issue to be determined is at what rate, for what period and on what basis is interest due in calculating the damages and/or restitution in respect of the loss of use of the surplus ACT?

On 27 November 2001 Wragge sent its retainer letter to AMC. The same day Mr Hoffman sent an e-mail to Mr Lowe with a spreadsheet showing the history of relieved and unrelieved ACT over the period 1990 to 1996:

On 6 December 2001 Mr Lowe sent Mr Hoffman’s schedule to Ms Young, stating that ‘Chief exec wants him to go back to 1973! He’s not going to start this process (it’ll take a couple of weeks), until he knows whether it will be necessary.’ Mr Lowe was thus prompted to raise the question whether it was necessary to collate interest rates back to 1973.

A claim form advancing AMC’s claim to compensation was filed on 15 January 2002. It later became of some significance that it put forward a claim for damages alone and not one based on compensation or restitution. Thereafter the Group litigation was organised in a manner where Messrs Slaughter and May conducted the test case on limitation issues in the name of Deutsche Morgan Grenfell, the quantum issues A and B in the name of Hoechst and quantum issue C in the name of FAG (UK).

On 7 March 2002, HMRC made an offer of settlement (Footnote: ⁷) which was sent to ‘all solicitors representing claimants within the former class 1 of the ACT Group Litigation Order’. The calculation of the compensation offered by HMRC was set out at clause 6 of the draft settlement agreement. In relation to utilised ACT, simple interest from date of payment to date of utilisation was offered, plus simple interest on that sum from the date of utilisation to the date of settlement. In relation to non-utilised ACT, simple interest was offered from the date of payment to the date of settlement. Mr Lowe noted in the margin of his copy: “Simple not compound (but interest on interest).”

Clause 8 of the draft settlement agreement stated: ‘Notwithstanding any other clause of this agreement, no compensation is payable under this agreement by the Revenue to the Claimant in respect of ACT paid to the Revenue more than 6 years before the day on which the claim form was issued.’

Clause 9 read: ‘The Revenue’s payment of compensation to the Claimant shall be in full and final settlement of the whole of any claim for relief which any member of the Group has issued against the Defendants arising out of or connected with the restriction to UK companies of the entitlement to make a joint election under section 247, including:

On 19 March 2002 following a long internal meeting at Wragge’s offices between Ms Young, Ms Benzimra and Mr Lowe, Ms Young wrote to Mr Farmer. The letter began by confirming that AMC’s claim involved EU Issues (I) (A) and (B), (II) (A) (B) (C) as specified in the GLO. The letter continued

On 20 March 2002 Mr Farmer emailed Ms Young stating that:

Also on 20 March 2002, Mr Farmer faxed Mr Sher, reporting to him that Wragge had recommended acceptance of HMRC’s offer subject to confirmation that it did not restrict the ability to claim for periods prior to 6 years before issue of the claim form. Mr Farmer then sent, at Mr Sher’s request, a detailed briefing note on 21 March 2002. This included the following paragraphs:

The same day Mr Hoffman sent an e-mail to Ms Benzimra attaching a spreadsheet setting out a calculation of simple interest on the within-time claims in the sum of £94,766. Mr Farmer then emailed Ms Benzimra (copied to Kevin Lowe, Harold Sher and Mick Hoffman):

Later on 21 March 2002 Mr Lowe sent to Mr Farmer a covering letter enclosing a fax from Ms Young to Mr Farmer. Ms Young’s fax said:

On 25 March 2002 Mr Farmer sent a fax to Lara Young which read:

Later the same day Ms Young had a discussion with Mr Banks at HMRC, followed by a discussion with Mr Farmer. These discussions were noted respectively as follows:

On 26 March 2002 Ms Young wrote to HMRC stating that:

On 5 April 2002 Mr Sher wrote to Preussag AG to give an update on the settlement discussions. As regards the pre-limitation period Mr Sher observed that without knowing the extent to which claims could be made in regard to earlier periods it was not possible to “determine whether the costs to be incurred in pursuing a claim would be economically justifiable.” Wragge sought to make much of the fact that Mr Sher left out from the draft of this letter the illustration that, if the claim could extend over a further 6 years, the sum at stake was about £350,000.

By now Wragge was in receipt of the Particulars of Claim in the Deutsche Morgan Grenfell (“DMG”) case. This contained a claim for compensation or restitution in respect of payments of ACT under a mistake of law As regards interest on that compensation there was a claim under Section 35A of the Supreme Court Act 1981 “and/or compound (or other interest) pursuant to the rules of equity”. In the Defence HMRC contended that any entitlement to interest was confined to a calculation based on a simple rate.

On 9 April 2002, Wragge received a copy of the Statement of Claim in the Hoechst proceedings. The quantum of the claim as regards “interest on ACT Cash Flow relating to dividends paid up to April 1994” was set out in Schedule Part I. But this had been redacted and thus did not indicate the basis on which interest had been calculated.

On 17 April 2002 Mr Farmer reported to Mr Sher that the proposed settlement would provide AMC with about £46,000 for unlawful ACT charged within the 6 year limitation period. This was compared with the claim by Hoechst said to be in the region of £8 million (although this would appear to be a false comparison since Hoechst’s claim was directed to the period from 1989 to 1994).

The same day Ms Young faxed Mr Farmer with a list of the some of the companies participating in EU issue (A) and(B) and concluded as follows:

On 23 April 2002 HMRC sent a standard form letter to AMC about the ACT litigation. That letter stated that: “We will resist arguments that any compensation payable should be computed on a compound interest basis and should extend to payments of ACT made more than six years before the date on which claims were issued.” This letter was forwarded to Wragge for their information on 1 May 2002. Ms Young then forwarded it to Mr Lowe to consider, on 8 May 2002.

On 17 May 2002 Slaughter & May, the solicitors representing many of the group claimants, sent to Wragges the common costs estimate for taking the cases to trial which dealt with the quantum and limitation issues: the figures were £1,167-£1,667 per company group for quantum issues, and £2,500-£3,653 for limitation issues. This was sent on to Mr Farmer on the same day, 17 May 2002.

A revised offer of settlement was received from HMRC on 25 June 2002. A detailed covering letter summarised the proposals made. Paragraph 30 of the covering letter said:

On 28 June 2002, Slaughter and May sent a fax to Wragge, giving notice of revised wording for Limitation Issue (A) that had been agreed with the Revenue:

claim for damages;

On 3 July 2002 Mr Farmer sent an email memo to Messrs Sher and Hoffman, recording a conversation with Ms Young and the position regarding the offer made by HMRC:

In an attendance note dated 10 July 2002, Ms Young records a telephone conversation with Slaughter and May. It refers to an agreement that in the event that a claimant settled it could remain a party to the Group action as regards pre-limitation losses. It went on to state that “formal notice would need to be given to Slaughter and May as settlement had been reached so that AMC may be withdrawn from the claimants sharing common costs of that particular test case.” This conversation, taken with the absence of any response to Wragge’s letter to HMRC of 26 March 2002 set out in paragraph 40 above, may be the origin of the mistake on Wragge’s part that acceptance of the pre-limitation offer would mean that AMC could and would unsubscribe from the quantum issues altogether.

Indeed later that day Wragge sent a letter to Mr Farmer in the following material terms:

The next event of note did not occur until 2003. On 18 February 2003 Slaughter and May gave notice that Hoechst had settled and thus would no longer be lead claimant on the quantum issues. On 21 February 2003 the Revenue issued new settlement proposals which were forwarded to Wragge but not sent on the AMC. These for the first time also offered to agree the quantum of those claims which accrued more than 6 years before claim forms were issued. The offer read materially as follows:

On 11 March 2003 Ms Young informed Mr Farmer by telephone that:

Further settlement proposals were received from HMRC on 18 March 2003, in the form of four letters of which the first two are pertinent:

Ms Young was then away from 19 March to 4 April and there after had no further conversation with Mr Farmer. HMRC’s offers of 18 March 2003 were sent to AMC by Wragge on 26 March 2003 whereafter they were considered by Mr Lowe and Ms Benzimra. On 2 April 2003 Mr Farmer sent an email to Ms Benzimra, attaching Mr Hoffman’s calculations of losses for claims within 6 years. These were now put forward, with guidance from the Revenue, in the sum of £141,354.22.

Also on 2 April 2003, Wragge received a letter from Slaughter and May enclosing a copy of an application to the court to replace Hoechst by Sempra Metals Ltd as test claimant for EU quantum issues (A) and (B. The application stated as part of the evidential support for the amendment that:

Ms Susan Wilson of Wragge who conducted a subsequent review of the file in August 2004 highlighted this paragraph during the review and added the notation: ‘DID WE TELL THE CLIENT ABOUT THIS’. (Footnote: ⁸) Wragge wrote to Slaughter and May on 4 April 2003 consenting to the application for Sempra to replace Hoechst as the test claimant for the quantum issues albeit when writing to HMRC the same day a number of questions were asked about the offer made in letter 1 of 18 March 2003, which related to the within time claims, but no mention was made of the offer in letter 2 for pre-limitation losses

Later still on 4 April 2003 the Revenue sent two faxes dealing with settlement issues of which the second is at the heart of the present dispute:

On 10 April 2003, at some time before 12.10 Mr Farmer telephoned Ms Benzimra, and her file note of the conversation reads as follows:

Also on 10 April 2003 Mr Farmer wrote to Dieter Kulow (of TUI AG, AMC’s parent company, formerly Preussag AG) describing the potential settlement of claims within six years, and stating correctly:

An email was sent from Ms Young to Mr Farmer at 15:53 on Friday 11 April 2003 which stated that:

Mr Farmer responded in an email on Monday 14 April 2003 at 14:24, stating that he had briefed Harold Sher on the current status and told him that AMC may need to sign a settlement agreement shortly. (Footnote: ⁹) Mr Farmer said that Wragge should contact Mr Sher if any issues arose. Mr Farmer then went on holiday from the evening of 14 April 2003. Wragge in fact made no contact with Mr Sher after 14:24 on 14 April 2003.

Then, at 11.11am on 15 April 2003, Ms Young sent a fax to HMRC, stating that:

The Revenue replied to Wragges by fax timed at 12.25pm:

Wragges replied by fax to the Revenue that they were instructed to ‘agree to the proposals in respect of EU Quantum Issues (A) and (B) subject to the outcome of the limitation issues, upon the terms set out in your correspondence of 4 April and 18 March 2003 respectively’. It is common ground that by virtue of that letter Wragges agreed the EU quantum issues with the Revenue for both AMC’s within six year claim and their pre-limitation losses claim in respect of compensation for loss of use of monies in relation to utilised ACT.

On 15 April 2003 Wragges sent a letter to the Chancery Division stating that AMC wished to abandon EU Quantum issues ‘described in paragraph 9(ii) A and B’ (ie those in relation to utilised ACT). Thereby AMC lost the right to contest the quantum issues in relation to utilised ACT claims for both within six years and pre-limitation losses. (Footnote: ¹⁰) In fact the Chancery Division also unsubscribed AMC from EU Quantum issue C, which related to unutilised ACT, and Wragge later confirmed to Slaughter and May that AMC had unsubscribed from Quantum Issues A, B and C. (Footnote: ¹¹)

In a memorandum dated 11 August 2003 Mr Farmer told Mr Sher about the outcome of the Deutsche Morgan Grenfell case at first instance. Although this did not directly touch on pre-limitation claims, Mr Sher immediately picked up the implications of any right to claim in respect of ACT payments in the 70’s and 80’s because of the then prevailing high level of interest rates: “potentially £ millions”.

On 12 November 2003 Slaughter and May sent to Wragge a costs estimate for the Sempra test case, involving EU Quantum Issues (A) and (B). On the face of it this was sent to Wragges by mistake, given that they had by then withdrawn AMC from the quantum issues, but it is to be noted in passing that the costs estimate given, which was in the region of £250,000 to £320,000 to the end of a first instance trial, was to be split between the 65 groups of companies who remained subscribed to quantum issues (A) and (B).

In due course the outcome of the limitation action at first instance emerged and on 5 February 2004 Ms Wilson (in the absence of Ms Young on maternity leave) reported the outcome to Mr Farmer and the fact that the appeal had been fixed for October. She added: As you are no longer pursuing the Quantum issues this is the only aspect in respect of which we are currently concerned.”

By 7 June 2004 Mr Farmer was asking Wragge what had happened to the settlement in relation to the within six year losses. This prompted a letter to HMRC on 25 June 2004 from Ms Wilson asking for an update on the position. On the same day Ms Wilson wrote to Mr Farmer:

In early July 2004 the first instance decision of Park J in the Sempra test case on quantum came to Mr Farmer’s attention. This prompted Mr Farmer to write an email to Ms Wilson on 5 July 2004, asking for a stock take of the litigation:

This prompted a telephone conversation between Mr Farmer and Ms Wilson, followed by an email from Ms Wilson on 16 July 2004 in which she indicated that her reading of the correspondence with the Revenue was that AMC had abandoned all their claims under EU Quantum issues A and B, and stated:

On 23 July 2004 Mr Hoffman sent an email to Mr Farmer discussing the position.

The file reveals several further conversations between Mr Farmer and Wragge, in which Mr Farmer maintained that AMC were not aware that they had settled any claim to compound interest. Indeed it was AMC’s case that it was unaware of any offer to settle the quantum of the pre-limitation claims let alone having authorised Wragge to do so on its behalf. (Footnote: ¹²) In this respect Mr Farmer’s note to the file dated 27 July 2004 following one call reads as follows:

These conversations led to Wragge’s undertaking, on 9 August 2004, to conduct a thorough review of the file and to compile a report for AMC. Ms Wilson did conduct a review of the file although notably she did not interview either Ms Young or Ms Benzimra. It is clear from Ms Wilson’s manuscript notes that she appreciated the significance of the Sempra application in April 2003 and also identified the potential problem with the claim form as regards pre-limitation losses. (Footnote: ¹³) In contrast, the report which was finally sent to AMC on 20 August 2004 was not revealing. In particular no view was expressed on the effect of the settlement correspondence relating to pre-limitation losses: rather AMC were told to read the correspondence for themselves and draw their own conclusions.

AMC finally received settlement of their within six year claims from HMRC on 15 September 2006, with the sum of £179,416 being paid. Thereafter on 25 October 2006 Mr Hoffman received an email from Ms Wilson notifying him that the test claimants had been successful on the limitation issues in the House of Lords and attaching a copy of the judgment. Mr Hoffman then prepared a schedule detailing the dividends and ACT paid by AMC from 14 October 1975 to 14 July 1995. This schedule demonstrated that, from 14 January 1976 up to and including 16 October 1995, AMC had paid the total sum of £3,454,206.87 by way of Relevant ACT (i.e. ACT which should never have been paid).

On 12 January 2007 Wragges wrote to AMC and for the first time advised them of a possible defect in their Claim Form, and telling them to obtain alternative representation. On 16 May 2007 Farrer & Co (‘Farrers’), by that stage instructed by AMC, sent a letter to HMRC stating that AMC had not intended to settle any part of their claim in relation to their pre-limitation losses, and asking for HMRC’s position on the matter. On 26 October 2007 Farrers sent to HMRC the data-set underlying AMC’s claim, described in that document as “a schedule prepared by our client with details relevant to its claims on the amounts of ACT paid, the dates of their payment and the dates upon which and the amounts in which those ACT payments were utilised against corporation tax liabilities.”

A meeting was then set up between a representative from HMRC (Ms Clare Dunne, from the ‘EU/DTA Challenges Team, CT & VAT’) and Mr Hoffman to discuss AMC’s claim. This took place at Farrers’ offices on 10 December 2007. One of the issues discussed by Mr Hoffman and Ms Dunne was how the tax credit forming part of the Franked Investment Income (‘FII’) received by AMC was to be credited against “Relevant” and “Non Relevant” ACT. The basic principle was that FII was off-settable against Franked Payments made by a UK resident company. Franked Payments were defined as the total of the dividend paid by the receiving company plus ACT at the rate relevant for the financial year in question. ACT was in consequence only actually paid on any excess of Franked Payments made out by a UK resident company over FII received in by it in any given accounting period. The purpose of offsetting FII against Franked Payments was, therefore, to calculate how much ACT had to be paid by the company in question.

Mr Hoffman explained to Ms Dunne that in his calculations to work out how much relevant ACT AMC had paid, he had set the FII off against Non Relevant Franked Payments first (i.e. those payments which were properly made and which would always have appeared on AMC’s CT61 returns in any event), and only any surplus FII remaining had then been set off against Relevant Franked Payments (i.e. those which should never have been made). This gave the amount of relevant ACT which AMC had mistakenly paid.

HMRC’s Ms Dunne expressed no disagreement in the meeting of 10 December 2007 as to the way in which Mr Hoffman had dealt with FII. Rather she stated that, subject to double-checking the position back at her office, she was satisfied with all of the information and explanations given by Mr Hoffman, except for one point relating to the order of set-off of the surrendered Relevant ACT within AMC’s subsidiaries.

There then followed a letter from HMRC dated 18 December 2007 which stated that:

This last remaining issue was a discrete one: HMRC argued that ACT surrendered to subsidiaries (Relevant and Non-Relevant) paid in one year should be set off before ACT paid in later years (in other words ‘First In First Out’, or ‘FIFO’). AMC on the other hand believed that all the Non-Relevant ACT surrendered in all the years should be set-off before Relevant ACT paid in the earliest year. (That is, Non-Relevant ACT paid and surrendered in years 1,2,3, etc should be set-off before Relevant ACT paid and surrendered in year 1.) This issue was not resolved between the parties and it was eventually determined, in HMRC’s favour, by Mr Justice Henderson, in the case of Europcar UK Ltd & ors v Revenue and Customs Commissioners [2008] EWHC 1363 (Ch). Following this judgment, Mr Hoffman prepared revised schedules of AMC’s ACT history, using his best interpretation of the FIFO methodology, and sent them to Ms Dunne on 27 August 2008 for review. HMRC then agreed Mr Hoffman’s figures.

On 26 November 2008 HMRC agreed AMC’s calculation of the claim for compensation for loss of use of monies in relation to utilised ACT, apply simple interest of base rate plus 1%, in the sum of £4,805,318 (up to 30 November 2008). This is the claim upon which AMC contends it would have received compound interest had it not settled EU Quantum Issues (A) and (B) in relation to pre-limitation losses related to utilised ACT.

Because of delays by HMRC in payment, the above figure had to be recalculated. On 15 January 2009 HMRC confirmed that it agreed with AMC’s calculations in relation to the utilised ACT loss up to 17 December 2008, in the sum of £4,810,286, with interest continuing to accrue at an agreed daily rate until payment).

By their letter of 15 January 2009 HMRC offered to agree the compound interest rate for AMC’s (still live) claim for loss of use of monies in relation to unutilised ACT at the Bank of England base rate, compounded monthly, stating:

The offer in the letter was accepted, and a settlement agreement was finally signed, in relation to all of AMC’s recoverable losses from HMRC on 12 March 2009. The sums recovered were £4,828,346.19 in relation to utilised ACT, and £4,583,066.12 in relation to unutilised ACT. Payment was made by the Revenue to AMC on 19 March 2009. The total sum paid was £10,062,056.86.

In the pleadings Wragge put AMC to proof of its allegation that the settlement of the pre-limitation claims achieved by Wragge’s fax of 15 April 2003 was effected without AMC’s authority. Whilst having no positive case that Ms. Young had been given instructions to accept HMRC’s offer in respect of the quantum issues relating to pre-limitation losses, Wragge rely upon a number of matters which were said to give rise to the inference such instructions were probably given. In brief they are as follows:

It is improbable that Ms. Young (or Ms. Benzimra) as competent lawyers would have acted without the instructions of their client. This is the more so when Wragge had a detailed understanding of AMC’s case and would not have been mistaken or confused about the terms of the settlement offer.

Ms. Young in her oral evidence claimed some recollection of a telephone conversation with Mr. Farmer relating to the pre-limitation losses in which Mr. Farmer intimated an interest in accepting HMRC’s offer because it was only open for a short period of time, it matched the offer in regard to the quantum of the in-time claims (which was perceived by Wragge as fair) and acceptance would save costs.

The potential value of the pre-limitation losses was not calculated until August 2003 after the settlement had been accomplished. Prior to that, it was thought by AMC (and Mr. Farmer in particular) that the pre-limitation claims were modest in value as compared with the cost associated with pursuing the quantum claims.

There was no statement or other evidence emanating from Mr. Farmer prior to his death in 2006 in which he asserted that Wragge had no authority to settle the quantum of the pre-limitation claims.

AMC’s position can be briefly summarised as follows:

The contemporary documentation evidences no instruction to Wragge to settle any part of the pre-limitation claim. To the contrary, the only instruction was not to prejudice any aspect of the pre-limitation claims.

It was also clear from the contemporary correspondence that Ms. Young and Ms. Benzimra were confused as to the nature of the offers made by HMRC and thus did not appreciate that AMC had to remain subscribed to the quantum issue to keep alive all aspects of the pre-limitation losses.

It was not suggested that either Mr Sher or Mr. Hoffman gave instructions to settle. Ms. Young’s recollection of a telephone conversation with Mr. Farmer was not even heralded in her witness statement. It was in any event inconsistent with Mr. Farmer’s immediate reaction to news of the Sempra decision at first instance to the effect that he believed that the pre-limitation claim based on compound interest had been preserved.

Wragge’s report following their own internal inquiry in August 2004 contained no suggestion that the settlement of the quantum issues in regard to the pre-limitation issues had been the consequence of any instruction from AMC. To the contrary it merely attached copies of the contemporary written exchanges and invited AMC to draw its own conclusions from them.

In my judgment, AMC has clearly satisfied the burden of proof imposed on it to establish that the settlement of the quantum issues in respect of pre-limitation utilised ACT was made by Wragge without AMC’s authority. Indeed, AMC’s instructions were implicitly to the effect that HMRC’s offer should not be accepted as all rights to claim for the pre-limitation period were to be preserved. In reaching this conclusion, I have for the reasons outlined above relied heavily on the contemporary material.

The only affirmative evidence in support of the proposition that instructions to accept were given by Mr. Farmer (no-one suggested that Mr. Sher or Mr. Hoffman gave such instructions) was contained in the oral evidence of Ms. Young. In her witness statement Ms. Young simply stated that she understood that AMC wanted to accept the offer. That understanding was apparently derived in large part from Mr. Farmer’s e-mail of 10 April 2003 in which, having accurately identified the nature of the offer, concluded by asking:

The short answer to this question would of course have been “no”. It certainly is not easy to construe, as Ms Young suggests, as an indication of interest in accepting the offer, let alone an instruction to do so. Indeed Ms. Young’s response the next day that: “It is understood that AMC agreed to accept the revised offer… subject to the issue of pre-limitation losses and interest” was on the face of it a recognition that AMC had agreed to accept the revised offer in regard to the in-time claims only.

When Ms. Young came to give evidence she confirmed the truth of her statement. Thereafter at an early stage of her cross-examination she was asked to confirm that she could not recall any letter, telephone call or e-mail giving instructions to settle the quantum issues as regards the pre-limitation losses. Her response was to assert that there had been a number of telephone conversations with Mr. Farmer in which Mr. Farmer expressed pleasure that a further offer had been made on the same basis as the in-time claims which if accepted would lead to a substantial saving of costs. At Day 3 p.129 she said this:

Ms. Young was inevitably asked why no mention of any such telephone conversation was contained in her witness statement. Her response at Day 4 p.3 was:

The date of any such conversation was not at all clear. If it took place it must have been after the first proposal from HMRC as regards the pre-limitation losses, namely 21 February 2003. As recorded above, there was indeed a telephone conversation between Ms. Young and Mr. Farmer on 11 March 2003 in which the pre-limitation offer was discussed and following which the misdirected fax was sent out. There is no further record in Wragge’s time sheets of a subsequent telephone conversation between them prior to 15 April 2003 (or any reference to one in the contemporary documents).

It is clear beyond doubt that Mr. Farmer did not give any instruction to accept the pre-limitation offer in that telephone call on 11 March:

Ms. Young’s attendance note makes no reference to such instruction. Indeed the relevant passage simply records: “LXY confirmed she would contact Derek again following receipt of the Inland Revenue’s further revised proposals”.

The misdirected fax which Ms. Young re-drafted after the telephone call simply records the terms of the offer and the fact that the time for acceptance had been extended to 28 March 2003.

Mr. Farmer’s report to Mr. Sher in his e-mail sent later on 11 March 2003 contains no request for authority to accept the offer let alone any suggestion that he had already given instructions to settle. Mr. Farmer was merely pleased to note that HMRC were presumably uncertain whether it would succeed in fending off the pre-limitation claims.

There is nothing remotely surprising about this. The offer letter of 21 February 2003 had not yet been forwarded to Mr. Farmer. A revised offer was anticipated. It is wholly improbable that Mr. Farmer would give instructions to accept an offer he had not seen. Indeed it is clear from Ms. Benzimra’s attendance note of her telephone call with Mr. Farmer on 10 April 2003 that he had done no such thing. He asked Ms. Benzimra whether HMRC’s letter of 18 March 2003 (containing the revised proposals relating to the pre-limitation losses which had been sent on to Mr. Farmer) whether it was necessary “to do anything else”. Ms. Benzimira said that it was not. The absence of any instruction nonetheless to accept the offer is confirmed by Mr. Farmer’s repeat of the question in an e-mail later that day:

The reality is that the offer from HMRC, which was in due course accepted, was that contained in HMRC’s letter of 15 April 2003:-

I do not suggest for a moment that Ms. Young was seeking to mislead the Court. These matters took place a long time ago. She left Wragge’s in 2005 to pursue interests outside the law. No doubt in preparation for giving her oral evidence she refreshed her memory from the contemporary material. Conscious of her professional training and the consequent unlikelihood that she would have concluded a settlement without authority, I conclude that the account of the telephone conversations is based more on reconstruction rather then recollection.

It seems to me to be clear that Mr. Farmer’s enthusiasm for an offer in regard to the quantum issues as regards pre-limitation can be traced, not to a view that the offer was sufficiently attractive, both in monetary and outlay terms, to require prompt acceptance, but to a sense of relief that HMRC regarded their case on pre-limitation issues as sufficiently vulnerable to justify settling the quantum aspects first. The essential theme of Mr. Farmer’s instruction remained the need to settle the in-time claims and, at the same time carve out the pre-limitation claims in their entirety.

How come that Ms. Young failed to achieve that goal? The answer in my judgment is that she had a misconception as to the inter-relationship between the quantum issues and the limitation issues. In her letter to HMRC dated 26 March 2002 she had actually put forward the suggestion that, in the event of settlement of the in-time claims (the proposal then on the table), AMC would discontinue participation in the quantum issues as a result. She had asked HMRC for confirmation “whether you agree with our interpretation”. However, HMRC did not put her straight. The same misunderstanding emerges from Ms. Young’s attendance note dated 10 July 2002 in regard to a telephone conversation with Slaughter and May.

This misunderstanding made its way into the concluded settlements. In Ms. Young’s letter of 15 April 2003, she stated that Wragge was “instructed to agree to the proposals in respect of the E U Quantum issues (A) and (B) subject to the outcome of the limitation issues”. The unhappy outcome was that any quantum argument in regard to pre-limitation losses relating to utilised ACT was abandoned despite in the same breath purporting to preserve the pre-limitation losses. The sense of confusion is heightened by the complete failure to grapple at the same stage with issue C relating to the quantum of pre-limitation utilised ACT.

In the result I conclude that there is no evidence to support the suggestion that Wragge were authorised to settle any of the quantum issues in regard to pre-limitation losses. I would go further. I say that the evidence is almost overwhelming that Wragge was specifically instructed not to settle those issues:

On 20 March 2002, Mr. Farmer asked for confirmation from Wragge that the proposed settlement of the in-time claims would not extinguish any rights to claim in respect of pre-limitation losses. He repeated this request in an e-mail that same day. Such confirmation was duly forthcoming the following day.

Mr. Farmer in his fax to Ms. Young on 25 March 2002 confirmed that having discussed the matter with Mr. Sher that AMC wanted to accept the proposal on the basis that it did preclude the ability to claim further back.

On 3 July 2002 Mr. Farmer spoke to Ms. Young to the same effect.

On 10 April 2003, Mr. Farmer made it clear that the second offer letter from HMRC dealing with pre-limitation losses was not to be accepted unless necessary.

In this context it matters not whether or not AMC had a true appreciation of the size of their pre-limitation claim or when its scale was first appreciated. For what it’s worth, it was in the wake of the Sempra decision in July 2004 that the claim became calculable on a compound interest basis. Whilst this may have been a pleasant surprise, I do not derive from it any support for the view that AMC had earlier thought that the claim was of only marginal value in the context of the legal costs of pursuing the claim and thus it can be inferred that AMC must have taken the opportunity to give instructions to accept HMRC’s offers.

Indeed in his letter of 5 April 2002 to the parent company, Mr. Sher stated in terms that the uncertainty as to the valid extent of the claims made it impossible to assess whether the costs were economically justifiable. By this stage, the claim was thought to be in the region of £350,000 for the previous 6 years alone. AMC’s share of the costs were trivial. Given the even higher interest rates for earlier years, it was obvious that the claim was substantial. But no detailed calculation had been made. Even if it was appreciated that compound interest was not a serious runner there was nothing in HMRC’s offer which was so attractive as to provoke a hurried acceptance. Accordingly I do not accept the argument that AMC would have been anxious to grab the offer on the table.

In further support of the submission that instructions to accept must probably have been given by AMC, Wragge sought to suggest that Mr. Farmer never made any complaint that the agreement, when revealed, had been reached without his authority. Such a proposition is not, in my judgment, tenable:

In his email to Ms. Wilson on 5 July 2004, Mr. Farmer set out his understanding that there was no impediment to recovery of compound interest in regard to the pre-limitation period.

On learning that the quantum had been settled, Mr. Farmer re-asserted his desire for confirmation that all rights had been preserved in accord with AMC’s requirement.

Mr. Farmer in his telephone conversation on 29 July made it plain that he wanted to know “how the settlement had been brought about” in circumstances where no-one had asked him whether AMC was prepared to give up its rights.

No challenge to this emerged from Wragge’s internal inquiry which simply invited AMC to draw its own conclusions from the documents. Accepting that invitation for myself, I find that the agreement was reached not only without authority but also counter to the instructions given.

Before turning to the issue of causation, I must deal briefly with the free-standing claim based on breach of duty. Given my conclusion on want of authority it is not necessary to do more than state my conclusion that Wragges negligently failed to advise AMC as to the issues in the GLO and in particular the nature and merit of the Quantum Issues. Indeed such was accepted by Wragge’s witnesses. The content and timing of any such advice will, or may, be relevant to the issue of causation. But I reject the contention that the scope of Wragge’s retainer was in essence a “watching brief”.

Whilst it may well be that the claims were of uncertain and (if based on simple interest) of modest size and whilst equally AMC may have been anxious to restrict their exposure to costs, these considerations did not relieve Wragge’s obligations to tender sound advice to their clients in regard to the claim in general and the offer of settlement in particular.

AMC sought to contend that:

Wragge owed a strict contractual obligation to AMC not to act outside the scope of its actual authority.

Wragge had been given no authority to reach any form of settlement in relation to the pre-limitation losses.

Because Wragges nonetheless effected a settlement, AMC lost the right to claim on a compound interest basis on utilised ACT.

In these circumstances, AMC is entitled to recover that loss without further causation inquiry.

In this respect some things can be stated with confidence:

The offer would have lapsed on that day.

AMC would have remained subscribed to Quantum Issues (A) and (B).

It follows Wragge’s formulation of the issue as being what AMC’s instructions would have been if asked whether it wanted to accept the offer does not arise save in the context of any failure to afford competent advice. Absent unauthorised acceptance the offer would have expired and thus there would be no offer to accept. The essential question is thus whether the offer would have been resurrected and whether AMC would then have un-subscribed to the Quantum Issues in any event. In this regard, I understand Wragge to place particular emphasis on the uncertain and limited value of AMC’s pre-limitation claims, the legal difficulties in a claim for restitution based on compound interest, the potential costs of participating in the litigation and the apparently favourable terms of the HMRC offer as regards simple interest. In contrast AMC contends that there is no basis (let alone evidence) for contending that un-subscription would have even come onto its agenda post 15 April 2003.

In my judgment the probabilities overwhelmingly favour AMC:

The offer had been accepted two weeks following the substitution of Sempra for Hoechst and the announcement that the argument for interest on a compound basis was to be the primary contention.

AMC had made it plain on 10 April 2003 that it wanted to carve out the pre-limitation quantum issues pending the outcome of the Deutsche Morgan Grenfell case.

Ms. Young had not understood the implications of the earlier offer. In any event, she left on maternity leave in late 2003. In the meantime, the decision on Deutsche Morgan Grenfell was handed down on 18 July 2003.

The fact that the claim was potentially worth “millions” was fully understood by August 2003 at the latest.

The costs estimates for the Sempra case were circulated in November 2003 giving a figure in the region of £4,000 per claimant.

The decision at first instance in Sempra was handed down on 16 June 2004.

It is difficult to determine against that background when it could be asserted that the offer would have been repeated let alone that it would have been accepted. Indeed, no case was put in that respect. In fact all the supposed problems of uncertainty and cost unravelled during this period. I am quite unable to accept the case that AMC would probably have withdrawn from the quantum issues post April 2003. To the contrary, I conclude that it almost certainly would not have done.

Strictly speaking this conclusion makes it unnecessary to consider the issue of causation against the background of AMC’s alternative plea of a failure by Wragge to afford any or any proper advice on the merits of pre-limitation quantum issues on or prior to 15 April 2003. Nonetheless I will briefly deal with it. This issue focuses on what advice would have been forthcoming and whether it would or may have led to withdrawal from the quantum issues.

Wragge submitted:

Ms. Young’s oral evidence was to the effect that the prospects of success in claiming compound interest were “very difficult”. This accurately reflected the orthodox view in 2003 of a reasonably competent solicitor.

It was clear from the decision in Westdeutsche Landesbank Girozentrale v. Islington B.C. [1996] AC 669 that compound interest was not available at common law and likewise restitutionary compensation was not to be awarded on a compound basis: see also McGregor on Damages 16 Ed para. 625.

It is doubtful whether AMC would have been prepared to pay for further advice. In any event this would have restricted to that tendered to the test claimants which itself would have been highly circumspect.

If in receipt of such advice, AMC would have given instructions to accept the offer (as indeed did over 50% of the other claimants).

In response AMC submits as follows:-

The reality is that neither Ms. Young nor Ms. Benzimra felt qualified to give advice on the issue. AMC would have insisted in any event on an opinion from counsel. Such had been Mr. Sher’s approach following the failure of the claim on pre-limitation losses in the Court of Appeal.

Any advice from counsel in Sempra would inevitably have been sufficiently encouraging to remain subscribed given the comparison between the potential outlay and the potential recovery.

The fact that half the claimants withdrew is not telling since the extent of their pre-limitation payments remain unknown.

Again I prefer AMC’s stance:

The fact of acceptance of the offer gives no indication of a contemporary view that the prospects of recovery of compound interest were poor. Ms. Young, as explained earlier, was confused about the implications of the last minute add-on by HMRC to its in-time claim offer.

Any assessment of the cost/benefit of the compound interest argument would have led to Wragge asking AMC to calculate the claims on a compound basis and draw comparisons with the legal costs. The outcome would have been an assessment of the value of the claim in the range of £7 million to £13 million against a costs exposure of a maximum of £20,000.

It is true that the offer of simple interest as opposed to compound interest for the in-time claims was considered fair. But having regard to the rates and periods involved, the disparity would have been small.

Whilst the simple interest rate offered by HMRC was on the generous side, again having regard to the margin in possible rates, the disparity would have been small in comparison with the sums at stake.

The evidence of Mr. Sher in this respect was convincing. As he put it in his witness statement:

Wragges contend that the quantum of AMC’s claim for Wragge acting in excess of its authority to settle the quantum issues relating to the utilised ACT must be assessed on “a loss of chance” basis and in particular:

the treatment of FII that was agreed between AMC and HMRC was incorrect as a matter of law; and

the rate of interest for compounding ought to have been the Treasury Bill Rate.

AMC’s response is that there can be no uncertainty as to the measure of loss since it employed the very same approach used by AMC and accepted by HMRC in respect of the unutilised ACT as part of the March 2009 settlement. In short the court knows what would have happened and does not, it is submitted, have to speculate as to what would have happened: Curwen v. James [1963] 1 WLR 748, Johnson v. Perez [1988] 166 CLR 351.

Against the background of the negotiations, it is clear that AMC’s approach is correct:

From the outset AMC maintained the position that it had not settled any part of the claim in respect of pre-limitation losses. Accordingly there was no call for HMRC to trim their arguments in respect of any part of the claim.

In presenting the written claim, AMC set out clearly the manner in which it had dealt with FII and duly explained the point in oral discussions with HMRC. HMRC expressed no disagreement. Indeed in their letter dated 18 December 2007 HMRC confirmed “Amounts of FII and how the set off of this has been allocated”.

It was on this basis that HMRC agreed AMC’s calculations for loss of use of monies in relation to unutilised ACT.

As regard the rates for compound interest in regard to unutilised ACT, HMRC wrote on 15 January 2009 as follows:

Given this background, there are no good grounds for concluding that HMRC would or even might have adopted a different approach to the settlement of a compound interest claim in regard to utilised ACT. It is in this respect of some note that Wragge was given leave to produce an expert’s report on the proper calculation of AMC’s claim. By an order of Clarke J dated 12 November 2010 Wragge was required to produce particulars of “all facts and matters relied upon in support of any contention that, if the agreement reached on 15 April 2003 had not been made, any settlement agreement with HMRC would or might have utilised any of the methods of calculation contained in the Defendant’s Report”. No such particulars were ever forthcoming.

In any event, as regards the specific issues relied upon by Wragge as giving rise to the prospect of different treatment, the following points can properly be made:

FII

Interest rate.

It follows that AMC’s claim must succeed in the sum of £7,655,473.13.