Supreme Court changes law on when time starts to run for limitation purposes in a claim to recover money paid under a mistake of law

In the latest decision in the long-running Franked Investment Income (“FII”) Group Litigation, the Supreme Court has held that, for a claim to recover money paid under a mistake of law, the statutory limitation period begins to run when a claimant could with reasonable diligence have discovered the mistake, in the sense of recognising that it had a “worthwhile claim”: Test Claimants in the Franked Investment Income Group Litigation & Ors v Commissioners for Her Majesty’s Revenue and Customs [2020] UKSC 47.

The court departed from the House of Lords decision in Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2006] UKHL 49, which had established that (in cases where a payment was made in accordance with the law as it was then understood to be) time did not begin to run until a judicial decision had established that the law was otherwise and, accordingly, the claimant had a well-founded cause of action. The court’s decision brings the law on limitation for claims based on a mistake of law in line with the position for cases of fraud or deliberate concealment, where time starts to run when the claimant knows enough to pursue a claim in fraud or to allege deliberate concealment – not when the fraud or concealment is established by judicial decision.

The Supreme Court was also asked to reconsider the earlier decision of Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, in which the House of Lords concluded that the statutory provision postponing commencement of the limitation period for claims based on a mistake included mistakes of law as well as mistakes of fact. The court affirmed that earlier decision, finding that the purpose of the provision was to relieve a claimant from the need to comply with a time limit at a time when it could not reasonably be expected to do so, and that purpose would be frustrated by excluding mistakes of law from the scope of that provision.

The decision provides a rare example of the Supreme Court overturning one of its own earlier decisions, or an earlier decision of the House of Lords, and in effect has re-written the law of limitation on the discoverability of a mistake of law. By focusing the enquiry on when the claimant recognised (or could with reasonable diligence have recognised) that it had a worthwhile claim, the court’s decision is likely to require evidence to be brought on developments in legal understanding within the relevant category of claimants and their advisers, which may include the need for expert evidence. The court recognised that this approach involves a more nuanced inquiry than a test based on when an authoritative appellate judgment determined the point in issue, but said there was no reason to think this would be unworkable in practice, or too uncertain in its operation to be acceptable. Continue reading

Court of Appeal clarifies test for rectifying terms of written contract for common mistake

The Court of Appeal has upheld a decision granting rectification of two deeds on the basis that they did not reflect the parties’ subjective common intention: FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361.

This is an important judgment which establishes, at Court of Appeal level, the test for rectifying a contractual document on grounds of common mistake, on which there had been conflicting authority and uncertainty as to the state of the law. It determines that, to establish a claim for rectification, a party must prove that the document failed to give effect to either:

  1. a prior concluded contract, in which case the terms of the prior contract must be objectively determined; or
  2. a common intention shared by the parties, in which case the existence of the intention must be established as a subjective state of mind – though it must also be shown that, as a result of communication between them, the parties understood each other to share that intention.

The court disagreed with Lord Hoffman’s (obiter) observations in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 that, even for the second limb above, the test is purely objective and subjective intentions are irrelevant. Leggatt LJ, who gave the judgment of the court, explained the doctrine as resting on an equitable principle of good faith – ie that a party will not be allowed to enforce the terms of a written contract when that would be against conscience because it was inconsistent with the parties’ mutual intentions at the time of contracting.

Unless and until there is a further appeal to the Supreme Court, therefore, the test to be applied is as set out above. In most cases, this is likely to mean (even) greater difficulty in establishing a claim for rectification for common mistake, in the absence of a prior concluded contract. In particular, a claim will not succeed unless the claimant can establish not only that it had a particular intention but that the defendant shared that intention, and that the parties understood one another to share that intention. (There may however be a claim based on unilateral mistake, if the defendant knew the claimant believed there to be a common intention when that was not in fact the case, and knew the document did not give effect to the claimant’s intention). Continue reading