Sempra Metals (2): recovering interest

The case of Sempra Metals (Limited) (formerly Metallgesellschaft Limited) v Her Majesty's Commissioners of Inland Revenue and another [2007] UKHL 34 is a turning point in the development of the law of England on two counts: interest and restitution (see (2007) 151 SJ 1046, 10.08.07).

Its contribution in respect of interest is that it widens the circumstances in which a claimant may be awarded compound, as opposed to simple, interest, from claims in equity, to include claims for interest on two bases: (1) as damages, when the interest constitutes damages for losses actually suffered (subject to the principles governing all claims for breaches of contract or claims in tort, such as proof of loss, remoteness of damage, failure to mitigate and so on), and (2) by way of restitution, when the other party has been unjustly enriched by the use of the money during the period. It was held that the court has jurisdiction to award compound interest as damages at common law, whereas it had formerly been thought that there was no jurisdiction to do so, whether at common law or by statute.

In respect of interest, the contribution of Sempra Metals is to hold that, where money has been paid pursuant to an unlawful demand or under a mistake of law, the recipient may have been unjustly enriched, not only by (and to the extent of) the retention of the money actually paid, but also by (and to the extent of) the use made of money. 'The use made of the money' may depend on the circumstances of each case, but may mean compound interest.

Restitution depends on a finding that the defendant has been unjustly enriched, and looks to the benefit that he has received, in contrast to the loss which the claimant has suffered. One would therefore expect the court to require clear evidence that the defendant has obtained compound interest. Yet the majority decision seems to encourage a generous approach to the evidence required of the defendant's enrichment in respect of compound interest.

It is now possible to recover compound interest even if the claimant cannot prove the defendant ever received it.

Restitution and damages

One might ask why Sempra needed to advance a claim in restitution as well as on the basis of damages. The practical importance to Sempra of the claims in restitution relates to the availability of remedies once the relevant limitation period had expired:

a claim in restitution based on mistake might defeat a defence based on the expiry of the limitation period. This is because, by section 32(1)(c) of the Limitation Act 1980, the commencement of the limitation period may be postponed to the time at which the claimant discovered, or could with reasonable diligence have discovered, that he had a claim '“ in Sempra's case, that the sums should not have been paid. But for the availability of a remedy on the basis of mistake of law, substantial amounts of Sempra's claims would have been statute-barred.

Claiming compound interest

The remedy of restitution has received an interesting extension by this case. Once their Lordships had agreed that the common law affords a right to claim compound interest as a head of loss, all were agreed that Sempra could recover its loss, subject to the limitation defence. The difference arose in respect of the entitlement on the basis of restitution.

Lord Scott and Lord Mance dissented on this issue: 'The conclusion of the majority. . . confuses the remedy for a payment made under a mistake with the remedy for a loss caused by a wrongful act' (paragraph 132 per Lord Scott). Lords Hope, Nicholls and Walker held that Sempra was entitled to compound interest by way of restitution.

The points made by Lords Scott and Mance are formidable. Naturally, they accepted that a claimant is entitled to recover whatever the defendant has actually earned (subject to change of position defences), because the claim in restitution is founded upon the extent to which the defendant has been unjustly enriched. 'If interest had been earned on the money it ought . . . [to] be held to be prima facie recoverable as part of the restitutionary remedy for the unjust enrichment . . . But if a claim is to be made for

interest that cannot be, or has not been, shown to have been received by the recipient of the mistaken payment, the claim must . . . be prosecuted as a claim for compensation' (paragraph 132, per Lord Scott). This is because 'as a matter of principle . . . an innocent recipient cannot be required to disgorge something that the recipient has never had' (paragraph 137 per Lord Scott). Lord Mance added that 'if a claimant in a claim for special damages can only recover his actual (pleaded and proved) loss of interest, no reason appears why a claimant should be entitled in a common law claim for restitution against an innocent recipient to recover anything other than the recipient's actual benefit' (paragraph 234).

Sempra's amended writ claimed 'restitution of, and/or compensation for, and/or compensation for the loss of use of, monies paid pursuant to unlawful demands by [the Revenue] and/or under a mistake of law,' and added that 'restitution for loss of use of sums so paid is to be calculated on the basis of the actual loss suffered by the plaintiff . . . and/or of the basis of the return which the plaintiff could have achieved by investing the sums so paid on the basis of a compound return and/or on the basis of the return which the defendants . . . did or could have achieved by investing the sums so paid and/or on the basis of the saving which the defendants . . . achieved by not having to borrow sums equivalent to the sums so paid'.

But there was no evidence that the Revenue derived any actual benefit from the premature payments. Indeed, the Revenue's evidence was that it was impossible to measure the amount of interest earned or saved by the Revenue on the advanced corporation tax (ACT) payments made by Sempra, and that it was wrong to assume that the government invested the sums it received on the basis of a compound return.

However, the issue was never decided, because, at first instance, and on the appeal to the Court of Appeal and on the first hearing before the Lords, it was common ground that, if compound interest were to be awarded, it should be calculated on a conventional basis: the rate would be derived from the dates of interest generally prevailing on borrowings during the relevant period.

Interest would be calculated without reference to the particular circumstances of the parties. It would be 'the reasonable price that would have to be paid to borrow the money' (per Lord Hope at paragraph 45).

Conventional rate

The Revenue subsequently submitted, in the adjourned hearing before the Lords, that in this case the conventional rate should be reached by reference to the rate of government borrowing. Neither party adduced evidence that the Revenue had or could have received compound interest by investing the ACT which Sempra paid, or that it had or could have received comparable benefits by not having to borrow equivalent sums. The rate claimed was a conventional or objective rate.

Hence, said Lord Scott: 'The cited paragraph [in the writ] . . . describes a claim for compensation dressed up, for limitation of action reasons, as a claim in restitution. The claim as described could . . . only succeed if it were based on a wrongful act. It constitutes a tort claim not a restitutionary claim' (paragraph 143).

How did the majority overcome those objections and hold that Sempra was, indeed, entitled to recover compound interest on the basis of mistake of law?

Lord Hope held that it was right to do so, by the use of a conventional, or theoretical, measure of the compound interest rate, because 'the enrichment has to be measured, even in cases such as this where it is impracticable to identify the amount of the benefit obtained by the enrichee. The basis of the restitutionary right is the unjust enrichment principle.

This suggests that, if a conventional rate of interest is to be adopted, it should be the one which is appropriate to the enrichee's circumstances' (paragraph 46). It was critical that no one suggested that the Revenue did not use the money at all (paragraph 48).

As a result, he held that the relevant rates were those appropriate to the Revenue's circumstances, and not ordinary commercial rates. It did not matter that Sempra could not prove how the extent to which the Revenue had been enriched, because 'a party ought not to be required to produce proof of matters that are unlikely to be within his own knowledge' (paragraph 47).

Lord Nicholls relied upon the valuing of the benefit derived by a defendant from unauthorised use of the claimant's land or goods as a useful analogy for measuring the value of the use of money, which he held to be 'prima facie the reasonable cost of borrowing the money in question' (paragraph 116).

He held that there was no need for Sempra to prove what interest the Revenue earned on the ACT payments, because its claim was not a proprietary one. It was not unjust to require the Revenue to pay compound interest on the 'huge interest free loan constituted by Sempra's payment of ACT' (paragraph 118).

'Time value'

The result in this case did not mean that the enrichee would always have to pay compound interest, or even simple interest, in respect of the 'time value' of the money he received.

'To avoid what would otherwise be an unjust outcome the court can, in an appropriate case, depart from the market value approach when assessing the time value of money, or indeed, when assessing the value of any other benefit gained by a defendant' (paragraph 119).

Lord Walker held that the correct route for Sempra was via an equitable and discretionary award of compound interest at a conventional rate calculated by reference to the average cost of government borrowing. This route afforded some protection from the solution of awarding compound interest as of right.

In the light of these divergent opinions, we can expect fertile debate on the extent to which compound interest may be awarded, and at what rates.