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

Unjust enrichment: High Court finds claimant entitled to restitution of the value of services provided in anticipation of a contract

The High Court has held that a supplier of soft toys was entitled to restitution of the value of the services it had provided to a toy designer, in anticipation of a contract to mass produce the developed toy. The judge further found that a claim in restitution for services provided in anticipation of a contract, unless such services are provided gratuitously or in such a way that indicates they were provided speculatively and at the provider’s risk, may still succeed “even if the idea of an enduring benefit to the defendant is essentially a fictional one”: Dowman Imports Ltd v 2 Toobz Ltd [2020] EWHC 291 (Comm).

Given the amount of work undertaken by the claimant in the development of the toy, the defendant’s encouragement and acceptance of the development services to advance the toy concept, and the defendant’s behaviour towards the claimant, the court held that the claimant had made out its claim in restitution. The defendant’s counterclaim, in respect of an initial sample order of the toys which the defendant alleged were defective, was dismissed.

Although the decision does not establish new legal principles, it illustrates that the absence of a concluded contract will not necessarily preclude a remedy where a party has performed services for the defendant – in particular where the defendant requested the services or accepted them when offered, knowing that such services were not intended to be given freely. Continue reading

Court of Appeal restricts scope for a defendant to reduce its liability for unjust enrichment based on the subjective value of its enrichment

The Court of Appeal has provided guidance on how to value a defendant’s benefit in a claim for unjust enrichment: Littlewoods Limited and others v The Commissioners for Her Majesty’s Revenue and Customs [2015] EWCA Civ 515.

A claimant in unjust enrichment does not claim damages for the loss it has suffered, but restitution of the benefit that a defendant has gained at the claimant’s expense. The starting point in calculating the defendant’s benefit is an objective market value.  Yet if the defendant can show that the actual value it received was less than the objective value, its liability will normally be reduced.

In the present case, however, the Court of Appeal said it was irrelevant that the actual value received by the defendant was less than the objective value: the defendant had had an opportunity to return or reject the benefit and had not done so. As it had “freely accepted” the benefit, it could not argue that the benefit was worth less to it than the objective market value. Although these principles have been discussed in judgments and academic writing, this is the first time they have been applied to form the basis of a judgment.

As a practical matter, and subject to any appeal to the Supreme Court (for which HMRC has said it will seek permission) this decision illustrates that if a defendant to an unjust enrichment claim wants to avoid the usual objective basis of assessment:

  • it needs to be able to demonstrate that the actual benefit it received was less than the market value; and
  • it will not be successful if the court concludes that it freely accepted the benefit.

Gary Milner-Moore and Dan Hoyle, a partner and senior associate in our dispute resolution team, consider the decision further below. Continue reading