Compound interest

Sempra Metals Ltd v Inland Revenue Commissioners and another [2007] UKHL 34; TLR 25 July

Under English law, as a general rule a claimant can recover damages for losses caused by a breach of contract or a tort, subject to the usual remoteness tests. That broad common law principle has been subject to the anomalous exception that there is no claim at common law for the loss of use of money in claims for breach of a contract to pay a debt. Damages for the loss of use of money have not been recoverable in cases falling within that exception: see London, Chatham and Dover Railway Co v South Eastern Railway Co [1983] AC 429. The common law should sanction this injustice no longer; the House should recognise the remnants of the restrictive common-law exception for what it was: the unprincipled remnants of an unprincipled rule. To that end, the House should now hold that, in principle, it is always open to a claimant to plead and prove his actual interest losses caused by late payment of a debt. Those losses would be recoverable, subject to the principles governing all claims for damages for breach of contract, such as remoteness, failure to mitigate and so forth. At present, the court is considered to have no jurisdiction to make an award of compound interest on a personal claim for restitution of a sum of money paid by mistake or following an unlawful demand. The position in London, Chatham and Dover Railway was the same regarding an award of interest on a claim for repayment of money paid by mistake, because a claim for repayment of money paid by mistake was founded on a implied contract. The fiction of an implied contract lingered long in the law and was not finally removed until Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548. Meanwhile, the law on the courts’ inability to award interest at common law on restitutionary claims remained settled. Hence, in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 counsel argued the case on the basis that no interest, whether compound or simple, was recoverable at common law. But sometimes interest, compound as well as simple, was recoverable in equity. The appeal proceeded on that footing. In those unusual circumstances, it was open to the House to re-examine the basic point of law conceded and not argued on the Westdeutsche appeal; namely, whether interest might be awarded by the courts in exercise of their common law jurisdiction to grant personal restitutionary relief. Having only recently been released from the shackles of implied contract and, hence, the restraints of London, Chatham and Dover Railway, the law of restitution should now have the opportunity to develop as a coherent body of principled law. The decision of the House in a case where that point had been conceded and assumed could not properly stand in the way. If the House took the opportunity, there could only be one answer. Nobody had suggested a good reason why, in a case like the present, an award of compound interest should be denied to a claimant. An award of compound interest was necessary to achieve full restitution and, hence, a just result. In the exercise of its common law restitution jurisdiction, the court had the power to make such an award. If that approach was adopted, the unfortunate decision in London, Chatham and Dover Railway would be effectually buried in relation to the payment of interest for non-payment of a debt and in relation to payment of interest for having the use of money in personal restitution cases. In cases of personal restitution, the value of the use of money was prima facie the reasonable cost of borrowing the money in question. The time value of money, measured objectively in that way, was to be distinguished from the value of the benefits a defendant actually derived from the use of the money. In the present case (involving the premature payment of tax to the Inland Revenue) there could be nothing unjust in requiring the Inland Revenue to pay compound interest, by way of restitution, on the huge interest-free loan constituted by the payment of advanced corporation tax. But that would not always be so. For instance, a recipient of a payment made by a mistake might make no actual use of the money. He might pay the money into a current account at the bank yielding little or no interest. In such a case, depending on the circumstances, it might well be most unfair that he should be out of pocket by having to make an additional payment, whether it be compound interest or even simple interest, in respect of the time value of the money he received. Here, as elsewhere, the law of restitution was sufficiently flexible to achieve a just result. To avoid what would otherwise be an unjust outcome, the court could, 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.