“Believe me, my young friend, there is nothing – absolutely nothing –
half so much worth doing as simply messing about in boats”.

Ratty to Mole (above), in Kenneth Grahame‘s
The Wind in the Willows (1908) chapter 1.

In Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 (HL) (pdf), the House of Lords held that taxes and other imposts unlawfully exacted by the State are recoverable by the taxpayer as of right, and that this duty to make restitution carries with it the obligation to pay interest on the sums unlawfully exacted. Three recent cases raise very interesting issues relating to this principle, and I want to discuss them in two posts. The first case is the decision of Cooke J in Island Ferries Teoranta v Minister for Communications [2011] IEHC 388 (18 October 2011)) and [2012] IEHC 256 (26 June 2012), and I will discuss it in its own terms in this post. The other two cases are the decision of the UK Supreme Court in the FII case (Test Claimants in the Franked Investment Income Group Litigation v Inland Revenue [2012] 2 WLR 1149, [2012] UKSC 19 (23 May 2012)) and the decision of the Court of Justice of the European Union in the Littlewoods case (Case C-591/10 Littlewoods Retail Ltd v Her Majesty’s Commissioners for Revenue and Customs [2012] ECR-I nyr, [2012] EUECJ C-591/10 (19 July 2012)), and I will discuss Island Ferries Teoranta in the light of those decisions in tomorrow’s post.

In Island Ferries Teoranta v Minister for Communications, Island Ferries Teoranta ran a ferry service between Rossaveel Harbour in Galway Bay and the Aran Islands. Various harbour charges – set by the Minister pursuant to the the Fishery Harbour Centres Acts, 1968–1980 – were payable by Island Ferries at the harbour. With effect from 1 May 2004, the Minister sought to introduce a new charges regime by means of the Fishery Harbour Centres (Rates and Charges) Order 2003 (SI No 439 of 2003). Island Ferries contested the legality of the new charges and of the new regime. They refused to pay the increased amounts, and continued to pay at the pre-2004 rate. On 30 June 2005, the Minister claimed €201,476.74 in harbour charges for the period from May 2004 to December 2004. The plaintiff declined to pay. Hence, on 17 August 2005, the Department withdrew the passenger vessel permits for two of the plaintiffs’ vessels; and, the following day, one of the vessels, the MV Ceol na Farraige (the “music of the sea”), was detained by the Harbour Master. After negotiations between the parties, on 30 of September 2005, the plaintiff lodged €200,000 in a bank account by way of a bond to secure the release of the vessel pending a resolution of the dispute; the MV Ceol na Farraige was released from detention; and the two passenger vessel permits were reinstated with effect from 3 October 2005.

In the first stage of the proceedings, Cooke J held that the charge applicable to the plaintiff (charge No 10(a) of Schedule 1 to the 2003 Order) was ultra vires the 1968 Act (see [2011] IEHC 388 (18 October 2011)). In the second stage of the proceedings, Cooke J awarded the plaintiffs a total of €92,243 by way of compensatory damages (see [2012] IEHC 256 (26 June 2012)). In both stages, Cooke J also considered some EU law issues, which will be revisited in tomorrow’s post.

Following Pine Valley Developments v The Minister for Environment [1987] IR 23 and Glencar Exploration plc v Mayo County Council (No 2) [2002] IR 112, he held that the Minister’s ultra vires actions would give rise to a claim in damages only if they came within one of three recognised heads of claim:

1. If it involved the commission of a recognised tort, such as trespass, false imprisonment or negligence.
2. If it is actuated by malice, e.g. a personal spite or a desire to injure for improper reasons.
3. If the authority knows that it does not possess the power which it purports to exercise.

Cooke J held that the detention of the MV Ceol na Farraige when the legal basis for doing so was non-existent was an actionable trespass within the first of these three conditions:

22. … It is wholly unrealistic in the circumstances of the exchanges between the parties from the 30th June, to the 18th August, 2005, to seek to dissociate the demand for payment of the charge from the decision to detain the vessel. The explicit purpose of the detention was to compel payment of the charge. The trespass was thus committed in order to exact payment of an amount which was not due. Further, the new charge was introduced in the 2003 Order within an existing regulatory framework which facilitated the collection and recovery of such charges. In the judgment of the Court, there was such an integral connection between the imposition without authority of the particular per capita passenger charge at Rossaveel (and in fact only at Rossaveel), and the exercise of the power to revoke the passenger ferry permits at Rossaveel and detain the vessel, as to bring the claim within the first of the conditions … above, namely “it involved the commission of a recognised tort such as trespass …”. …

He was – in a dictum that was, having regard to Beatty v The Rent Tribunal [2006] 1 ILRM 164, [2005] IESC 66 (21 October 2005), frankly unnecessary and thankfully obiter – prepared to go further and take a particularly expansive view of what might constitute a wrong for the purposes of the first condition, but that need not detain us here. What matters for present purposes is that Cooke J held that the plaintiffs were entitled to recover (i) the commission of €28,000 they had to pay to the bank to put the bond in place, (ii) the profits they lost due to the non-operation of their two vessels for 47 days between 17 August 2005 and 3 October 2005, amounting to €24,370, (iii) various associated losses of €3,005 and €11,868; and (iv) general damages in the sum of €25,000 (for a total of €92,243). However, he declined to award exemplary damages (following Conway v INTO [1991] 2 IR 305 and McIntyre v Lewis [1991] 1 IR 121).

The plaintiffs also claimed that they had paid €38,119 more on interest on their debts than they would have done had the €200,000 bond been available to them to reduce their debts. This claim to the “net interest cost” failed on the facts, as there was no evidence that such surplus cash had ever used to reduce debts, as opposed to being kept on hand to tide the plaintiff over the lean part of the year. (Compare this with Sempra Metals v IRC [2008] 1 AC 561, [2007] UKHL 34 (18 July 2007) [44]-[47] (Lord Nicholls)). Suppose, however, the plaintiffs, instead of lodging the €200,000 bond, had – under protest – in fact paid the €201,476.74 claimed by the Minister. In Murphy v AG [1982] IR 241 (SC) (rft), income taxes were paid pursuant to an unconstitutional statutory provision, and the Supreme Court (following Dolan v Neligan [1967] IR 247 and Rogers v Louth County Council [1981] IR 265; [1981] ILRM 143) allowed their recovery on the basis of mistake of law and duress colore office. Had the plaintiffs paid the €201,476.74, they might very well have been able to establish a claim based on mistake (cp Air Canada v British Columbia [1989] 1 SCR 1161, 1989 CanLII 95 (SCC) (04 May 1989); Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, [1998] UKHL 38 (29 October 1998)), and would almost certainly have been able to establish one based on duress (cp Mason v New South Wales (1959) 102 CLR 108, [1959] HCA 5 (27 February 1959)).

Moreover, In Woolwich v IRC [1993] AC 70 (HL), the House of Lords held that a plaintiff is entitled to restitution of overpaid taxes and charges, plus interest. In Deutsche Morgan Grenfell v IRC [2007] 1 AC 558, [2006] UKHL 49 (25 October 2006), the House of Lords affirmed that a plaintiff who potentially has several causes of action to recover overpaid taxes (in that case, mistake and Woolwich) is not confined to the Woolwich claim. Rather, the plaintiff is entitled to take advantage of the most advantageous remedy – in the case itself, it meant that the plaintiff could elect to rely on the cause of action for mistake, because it was not statute-barred, whereas the the Woolwich claim was. And in the FII case [2012] UKSC 19 (23 May 2012), the UK Supreme Court confirmed a formal demand by the relevant public authority is not an essential ingredient of the Woolwich cause of action. As a consequence, since the Woolwich principle applies to the restitution of all sums paid to a public authority which were in fact not due, it thus applies to self-assessed taxes, for which there is no official demand.

The flexible Woolwich principle has been adopted throughout the common law world (eg, Commissioner of State Revenue v Royal Insurance Australia Ltd (1994) 182 CLR 51, [1994] HCA 61 (7 December 1994); Waikato Regional Airport Ltd v AG [2002] NZCA 61 (27 March 2002) and [2003] UKPC 50 (30 June 2003)). Hence, in In re Article 26 and the Health (Amendment) (No 2) Bill, 2004 [2005] 1 IR 105, [2005] IESC 7 (16 February 2005) and especially in Harris v Quigley [2006] 1 IR 165, [2005] IESC 79 (01 December 2005), the Supreme Court affirmed a strong line of High Court authority (O’Rourke v Revenue Commissioners [1996] 2 IR 1 (HC) 12-13 (Keane J); Goodman v Minister for Finance [1999] 3 IR 356 (HC) 378-379 (Laffoy J); Bank of Ireland Trust Services v Revenue Commissioners (No 1) [2002] 4 IR 178 (HC) 187-189; [2003] 2 ILRM 241, 248-251 (Kelly J); Bank of Ireland Trust Services v Revenue Commissioners (No 2) [2003] 3 IR 398, [2003] IEHC 59 (15 July 2003) (Kelly J)) that the claim to restitution plus interest recognised in Woolwich v IRC [1993] AC 70 also formed part of Irish law. Had the plaintiffs paid the €201,476.74, they would certainly have been able to establish a claim based on the Woolwich principle.

In these circumstances, the plaintiffs would have been entitled not only to the restitution of the €201,476.74 but also to interest. In tax cases, claims for interest are governed by section 865A of the Taxes Consolidation Act, 1997 as inserted by section 17 of the Finance Act, 2003 (also here) – subject, in the case of VAT to a special version of the defence of passing on (confusingly called “unjust enrichment”) (see section 100 of the Value Added Tax Consolidation Act, 2010). (However, in cases where the restitution of the tax arises as a matter of EU law, these provisions may not amount to an exclusive regime – consider the treatment of section 33 of the Taxes Management Act 1970 in the FII case [2012] UKSC 19 (23 May 2012), and see also the Littlewoods case [2012] ECR-I nyr, [2012] EUECJ C-591/10 (19 July 2012)).

On the other hand, interest on restitution of other imposts and levies is governed by the common law principles. The plaintiffs’ claim to the “net interest cost” on the €200,000 bond as a recoverable head of loss in tort was functionally equivalent to a claim for interest on foot of a claim to restitution of the €201,476.74. Interest is the use value of money over time. The plaintiffs had sought to demonstrate the use they would in fact have made of the €200,000 had it not been stymied in the bank account, but the claim failed on the facts. However, where interest is available as of right, it is awarded not because of any particular use which might have been made of it, but simply because the plaintiff should not have been without the money in the first place.

The Woolwich principle once established, the main issue in many of the subsequent cases has been not the availability, but the extent, of interest on the sum to be returned. In that case, the plaintiffs claimed interest pursuant to section 35A(1) of the Senior Court Act 1981 (section 35A(1) was inserted by the Administration of Justice Act 1982, section 15(1), and Schedule 1, Part I; and the 1981 Act was renamed from the Supreme Court Act 1981 by virtue of the Constitutional Reform Act 2005, sections 59 and 148, and Schedule 11, para 1(1); it is the equivalent of section 22 of the Courts Act, 1981 (also here)). Courts Act interest is simple interest; and in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, [1996] UKHL 12 (22 May 1996) the House of Lords held that a court could award compound interest neither in the exercise of this statutory jurisdiction nor on the basis of general common law principles, but only in support of equitable claims which were not made out on the facts. However, in Sempra Metals v IRC [2008] 1 AC 561, [2007] UKHL 34 (18 July 2007), the House of Lords held that compound interest might be available by virtue of the very nature of the restitutionary claim itself, conceived as a claim for the time value of money by which a defendant is unjustly enriched, so that the sum which represents the value of the money to the defendant over the period of the enrichment falls to be calculated by compounding interest over that period. The ECJ held that the operation of the UK’s Advance Corporation Tax (ACT) regime was invalid having regard to EU law, so that the plaintiffs had been charged to corporation tax earlier than they should have been. They sought interest for the period when the Revenue should not have had the tax, and the House of Lords held that compound interest was appropriate in such circumstances. As Lord Hope put it:

33. … money has a value, and in my opinion the measure of the right to subtraction of the enrichment that resulted from its receipt does not depend on proof by Sempra of what the Revenue actually did with it. It was the opportunity to turn the money to account during the period of the enrichment that passed from Sempra to the Revenue. This is the benefit which the defendant is presumed to have derived from money in its hands … Restitution requires that the entirety of the time value of the money that was paid prematurely be transferred back to Sempra by the Revenue.

34. All this points to the conclusion … that, for restitution to be given for the time value of the money which was paid prematurely, the principal sum to be awarded in this case should be calculated on the basis of compound interest. …

41. … Computation of the time value of the enrichment on the basis of simple interest will inevitably fall short of its true value. Such a result would conflict with the principle that applies in unjust enrichment cases, that the enrichee must give up to the [plaintiff] the enrichment with … no hint of a restriction to giving back. In my opinion the compounding of interest is the basis on which the restitutionary award in this case should be calculated.

Similarly, for Lord Nicholls, the plaintiffs’ claim for compound interest was, in principle, unanswerable:

102. … The benefits transferred by Sempra to the Inland Revenue comprised, in short, (1) the amounts of tax paid to the Inland Revenue and, consequentially, (2) the opportunity for the Inland Revenue, or the Government of which the Inland Revenue is a department, to use this money for the period of prematurity. The Inland Revenue was enriched by the latter head in addition to the former. The payment of ACT was the equivalent of a massive interest free loan. Restitution, if it is to be complete, must encompass both heads. Restitution by the Revenue requires (1) repayment of the amounts of tax paid prematurely (this claim became spent once set off occurred) and (2) payment for having the use of the money for the period of prematurity.

103. In the ordinary course the value of having the use of money, sometimes called the ‘use value’ or ‘time value’ of money, is best measured in this restitutionary context by the reasonable cost the defendant would have incurred in borrowing the amount in question for the relevant period. That is the market value of the benefit the defendant acquired by having the use of the money. This means the relevant measure in the present case is the cost the United Kingdom government would have incurred in borrowing the ACT for the period of prematurity. Like all borrowings in the money market, interest charges calculated in this way would inevitably be calculated on a compound basis.

112. … Nobody has suggested a good reason why, in a case like the present, an award of compound interest should be denied to a [plaintiff]. An award of compound interest is necessary to achieve full restitution and, hence, a just result.

Despite the complex EU tax background, and although it was supported by EU remedies law, in the end this was a conclusion as to the availability of compound interest for restitution claims at common law. Hence, if the plaintiffs in Island Ferries Teoranta had paid the the €201,476.74 demanded by the Minister, in principle they would have been entitled to its recovery plus compound interest, at least as a matter of private law. The Supreme Court of Canada has taken a more radical and less circumscribed approach to cases of restitution in such circumstances, founded in principles of public law (Kingstreet Investments Ltd v New Brunswick [2007] 1 SCR 3, 2007 SCC 1 (CanLII) (11 January 2007) and Marcotte v Longueuil 2009 SCC 43, [2009] 3 SCR 65 (CanLII) (08 October 2009)). In Island Ferries Teoranta Cooke J did not need to reach the constitutional issues raised by the plaintiffs (see, in particular, the judgment in the first stage of the proceedings, at para [67]). However, by analogy with the Canadian positions, these issues might have reinforced the approach to any restitutionary remedies in the second stage of the proceedings. In the case itself, no private law restitution claim was available because the plaintiffs had not in fact paid the Minister the €200,000 bond, which had simply been lodged to a bank account to guarantee payment of the harbour charges if they turned out to be due. In those circumstances, it is difficult to see how the Minister would have been enriched, and thus no private law claim for restitution of an unjust enrichment could have been maintained. However, if public law principles are instead applicable, this is not a necessary conclusion. As Bastarache J put it for the Court in Kingstreet:

34. … I would not decide this appeal as a matter of unjust enrichment. The taxpayers in this case has recourse to a remedy as a matter of constitutional right. This remedy is in fact the only appropriate remedy because it raises important constitutional principles which would be ignored by treating the claim under another category of restitution. Claims of unjust enrichment against the government may still be appropriate in certain circumstances (…). Nevertheless, it is my view that the analytical framework of the modern doctrine of unjust enrichment is inappropriate in this case.

35. In a colloquial sense, it might be said that the retention of improperly collected taxes unjustly enriches governments. However, a technical interpretation of “benefit” and “loss” is hard to apply in tax recovery cases. Furthermore, in the context of this case, the unjust enrichment framework adds an unnecessary layer of complexity to the real legal issues. Some of the components of the modern doctrine are of little use to a principled disposition of the matter, but are rather liable to confuse the proper application of the key principles of constitutional law at issue.

40. … Actions for recovery of taxes collected without legal authority and actions of unjust enrichment both address concerns of restitutionary justice, but these remedies developed in our legal system along separate paths for distinct purposes. The action for recovery of taxes is firmly grounded, as a public law remedy in a constitutional principle stemming from democracy’s earliest attempts to circumscribe government’s power within the rule of law. Unjust enrichment, on the other hand, originally evolved from the common law action of indebitatus assumpsit as a means of granting plaintiffs relief for quasi-contractual damages.

In Island Ferries Teoranta, such an approach, uncircumscribed by private law principles of restitution for unjust enrichment, might well have concluded that, since it was the Minister’s ultra vires demand which was responsible for the fact that the €200,000 bond was stymied and beyond the plaintiffs’ use, the Minister should make the plaintiff whole again by paying interest on that sum, even though he would not have been enriched as a matter of private law. This is, of course, a large leap – but the Canadian cases provide little guidance for their novel and radical development, so the argument considered here must at least be available (unprincipled and unattractive though it might be).

In conclusion, then, both at private law and in public law, many restitution issues could have arisen on the facts of Island Ferries Teoranta. If the plaintiffs had paid the the €201,476.74 demanded by the Minister, in principle they would have been entitled to its recovery plus compound interest as a matter of private law. As a matter of public law, they may have been able to claim interest on the €200,000 bond. In tomorrow’s post, I will build on those conclusions. In the meantime, though, this is what a claim based upon restitution and unjust enrichment principles might have looked like, had the case evolved slightly differently.