| Date | 31 October 2007 |
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| Judgment | Sempra Metals Limited v Inland Revenue Commissioners. HL 18 July 2007. |
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| The Issue | The application of compound interest to claims for late payment of a debt. |
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| Implication |
At common law, subject to the ordinary rules of foreseeability, the loss suffered as a result of the late payment of money is recoverable and may be quantified by applying compound interest to the principal sum. Compound interest may also be applicable where the claimant makes its claim in restitution. |
printIn July of this year the House of Lords gave judgment in a case dealing with the application of compound interest to claims for damages. In so doing it might be said that the general law on this subject in England and Wales has been finally brought into the 21st Century. Until recently, the general rule of English common law was that the courts had no power, in the absence of any agreement between the parties, to award interest as compensation for the late payment of a debt or damages. This rule was primarily founded upon the 1893 decision of the Court of Appeal in the case of the London, Chatham and Dover Railway Company v South Eastern Railway Company. Over the years this rule has been chipped away but never fully set aside. For example, in 1985 in the case of President of India v La Pintada Compania Navigacion, it was accepted that a loss due to late payment might be recoverable if it constituted ‘special damages’. This meant that the claimant would have to prove that the loss arose from special circumstances of which the defendant had actual knowledge. In other words, the law would not acknowledge that interest loss would arise in the ordinary course of things. This mystified many observers. The modern reality is that every creditor who is deprived of funds to which he is entitled and which he needs to run his business will have to incur an interest bearing loan or employ other funds which could themselves have earned interest. Manifestly, in such circumstances, interest losses are reasonably foreseeable as they will arise in the ordinary course of things. Perhaps recognising this as an anomaly, Parliament has, over the years, introduced by statute alternative means by which interest might be payable. The statutes however are limited to simple interest and make no provision for compound interest. This most recent case before the House of Lords, Sempra Metals v Inland Revenue, concerned the premature payment of corporation tax. Briefly, until it was repealed in 1999, a company was liable to pay Advanced Corporation Tax (ACT) on any amount it paid out in dividends. Any ACT paid by a company was set-off against the company’s liability to Corporation Tax when it subsequently fell due. ACT could be avoided in circumstances where dividends were paid by a subsidiary company to its parent company. This exclusion, however, was only available when both the parent and the subsidiary company were resident in the United Kingdom. In 2001 the European Court of Justice held that this provision contravened Article 52 of the Treaty of Rome. The European Court held that any companies which had been unlawfully required to pay ACT were entitled to restitution or compensation to be enforced under the relevant domestic law. Sempra Metals brought its case as a test case identifying four tranches of ACT amounting to approximately £5.5 million that it had paid between 1981 and 1994. The principal sums had been reimbursed to Sempra, but Sempra claimed compound interest upon these amounts. In order to avoid the six year limitation period which would otherwise apply to its claim, Sempra sought to take advantage of the extended limitation period available under the 1980 Limitation Act where the action is for relief from the consequences of a mistake of law. Consequently Sempra brought its case in restitution under the principal of ‘unjust enrichment’. In essence, Sempra claimed that the Inland Revenue was unjustly enriched because Sempra had paid the tax in the mistaken belief that it was obliged to do so, when in fact the tax was being levied prematurely. A claim made in restitution differs fundamentally from a claim for damages. It is the gain or benefit that has been obtained by the defendant that needs to be measured, not the loss to the claimant. The House of Lords held that the measure of restitution to be applied in this case would be achieved by the application of compound interest over the relevant period. Lord Hope of Craighead commented that it was open to the Revenue to demonstrate that there was no actual enrichment when the money fell into its hands, notwithstanding the opportunity to put the money to good use. The Revenue argued that because of the nature of the financial relationship between the government and the Bank of England it was impossible to measure the amount of interest earned or saved by it or by the government generally on the sample ACT payments paid by Sempra. According to a majority of the Law Lords, this justified resorting to a commercial rate of interest as a measure of the benefit obtained by the Revenue, unless the Revenue could demonstrate that it would have been able to borrow money at rates which were more favourable than those available in the ordinary commercial market. In dissenting in part from this judgment Lords Scott and Mance clarified that when a claimant made its case in restitution, it was important to refer to the actual benefit obtained by the recipient. Since the claim arose from the consequences of a mistake, the Revenue should, in their view, be regarded as the innocent recipient of this money. Such a person would be free to put the money in a non-interest bearing current account or even under their bed, in which case there would be no benefit payable to the other party.
CJ-0743
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