The Law of Restitution

Introduction

The law of restitution is concerned with the award of a generic group of remedies which arise by operation of law and which have one common function, namely to deprive the defendant of a gain rather than to compensate the claimant for loss suffered. These are called the restitutionary remedies.

Whilst there is a great deal more to the subject than this remedial aspect, since it is also vital to determine what circumstances will trigger the award of restitutionary remedies, it is only because there are a group of remedies which have a common function of depriving defendants of gains that we are able to assert that there is an independent body of law which can be called the law of restitution.

To understand what these remedies are, how they operate and when they are available requires examination of a complex body of law. To assist in the understanding of this law it is necessary to identify and analyse the principles which underlie the rules.

The Nature of the Law of Restitution

The law of restitution is that body of law which is concerned with the award of gain-based remedies. Although the matter has been particularly controversial, the accepted view is that these gain-based remedies will be awarded in three different situations.

First, where the defendant has profited from the commission of a wrong. This could apply to a public authority if it has profited from the commission of a tort or, exceptionally, breach of contract.

Second, where the defendant has received property in which the claimant has a proprietary interest, the claimant will be able to vindicate that property right.

Third, where the defendant has been unjustly enriched at the claimant’s expense. It is this principle which is likely to be most significant to restitutionary claims against public authorities .

To establish such a claim four different issues must be considered:

One: Whether the defendant was enriched. This will invariably be satisfied by means of showing that the defendant received money.

Two: This enrichment was at the expense of the claimant, which means that it was obtained directly from the claimant.

Three: This enrichment can be characterised as unjust within one of the recognised grounds of restitution. It is the identification of an appropriate ground of restitution which has proved to be the most controversial aspect of establishing a restitutionary claim against public authorities.

Four: No defences are available to reduce or limit the claim. Key defences include change of position and estoppel.

Restitution at Present: The relationship between the grounds of restitution

The crucial issue now concerning restitutionary claims against public authorities relates to whether the operation of the Woolwich principle excludes the operation of the other private law grounds of restitution.

In IRC v Deutsche Morgan Grenfell Group plc , the Court of Appeal recognised that claims for restitution of tax paid by mistake can only arise by reference to particular statutory provisions or at common law by virtue of the Woolwich principle. In reaching this decision the Court of Appeal drew a distinction between public and private restitutionary claims and recognised that, for the recovery of overpaid taxes at least, restitution occurs by virtue of a specific public law regime which is distinct from the private law regime which governs the bulk of the law of unjust enrichment.

Jonathan Parker LJ interpreted this as meaning that overpaid taxes can be recovered either by virtue of a statutory regime, where the demand for payment was lawful, or, by reference to the Woolwich principle at common law, where the demand was unlawful.

Crucially, he considered that these are the only regimes which are available for the recovery of overpaid taxes. It follows that, at least as regards claims for the recovery of overpaid tax, it is not possible to rely on the ground of mistake of law and so gain the benefit of the extended limitation period. Although the matter is not free from doubt is appears that this ruling applies to the recovery of all payments from public authorities, at least when the authority has received the payment in its public capacity. Consequently, mistake is not available as a ground of restitution in claims involving public authorities.
The recognition in Deutsche Morgan Grenfell that the Woolwich principle is rooted firmly in public law is important, both as regards the proper analysis of the claim but also as regards the practicalities of bringing it .

Until recently it appeared that if claimants wished to challenge a demand from a public authority as an ultra vires demand, then, because this constituted a public law claim, they had to do so by virtue of judicial review under CPR 53. It is not, however, possible to obtain restitutionary relief in judicial review proceedings. This meant that if the claimant wished to obtain restitution from a public authority he or she would have to adopt a dual procedure. The claimant would first need to apply by judicial review for a declaration that the demand was unlawful and then seek restitution of the money in separate proceedings.

This was the procedure which the Woolwich Building Society had to adopt to obtain restitution from the Revenue. The need for judicial review has important implications in that the limitation period for such an application is three months from the date when the ground for challenge arises, though this is subject to the discretion of the court.

However it was subsequently accepted by the Court of Appeal that, where the claimant wishes to obtain restitution on the ground of ultra vires receipt, it is not necessary first to bring judicial review proceedings. The claimant can bring a restitutionary claim at common law to show that the money was not due and, once this has been established, to recover the overpaid tax from the public authority. This is a perfectly acceptable approach, since the dominant issue for the claimant relates to the existence of a private law right, namely the right to restitution because the defendant was unjustly enriched at the claimant’s expense, even though the existence of this right is dependent on the consideration of a public law issue, concerning whether the public authority is authorised to receive the particular payment.

This decision is of vital importance, both because it avoids the cumbersome procedure involving both judicial review and a separate claim for restitution, but also because it avoids the very short limitation period which is inherent in an application for judicial review. It consequently makes ultra vires receipt of a particularly attractive ground of restitution for the claimant to plead. However, the emphasis in Deutsche Morgan Grenfell that a restitutionary claim grounded on the Woolwich principle is properly characterized as a claim involving the public law regime may serve to undermine this sensible approach to restitutionary claims against public authorities, such that the former dual process of judicial review and then restitutionary claim might be resurrected. This appears to have been the approach of the Court of Appeal in Boake Allen Ltd v IRC where Sedley LJ emphasized that it was ‘an abuse of process to ignore the primary mode of challenge provided by law(namely challenge by judicial review) and instead to bring an action which evades the controls on that mode.’ Indeed, the emphasis on the public law claim might mean that both the judicial review and the restitutionary aspects should be dealt with in the Administrative Court, because the right to restitution is properly characterised as being a public law rather than a private law right . This would require the courts to accept that a restitutionary remedy could be awarded in judicial review proceedings by means of the mandatory order, but it would follow that the much shorter limitation period would be applicable and that the awarding of a restitutionary remedy would lie in the discretion of the court.

Recommended Future Changes in the Law of Restitution

The decision of the Court of Appeal in Deutsche Morgan Grenfell is dubious for the following reasons, and thus should be rejected:

Firstly, the dictum of Lord Goff in Kleinwort Benson arose in the course of a discussion about the availability of a settled law defence to claims to recover different types of payment, and was not concerned with the more important question of whether a mistake of law claim is unavailable where taxes are involved. If Lord Goff had intended to draw such a fundamental distinction he might have been expected to do so explicitly. In any case, the dictum of Lord Goff was obiter because the case did not concern restitution of taxes or other charges.

Secondly, the fundamental purported distinction between so-called ‘public’ and ‘private’ transactions is both unworkable and unnecessary. The assumption appears to be that in Woolwich the transaction was ‘public’ because it involved payments of taxes to the Revenue, whereas in Kleinwort Benson the transaction was ‘private’ because it involved an interest rate swap transaction between a bank and a local authority. Yet why is the latter transaction treated as ‘private’?

Certainly it appears to be a commercial transaction which was voluntarily made, but the transaction was with a public authority and, crucially, the only reason why the transaction was considered to be void was because the council lacked the capacity to enter into it as a public authority . This was also true of the Woolwich case which involved an ultra vires transaction with a public authority. Surely the nature of the restitutionary claim in each case should be determined by reference to the characteristics of the recipient, rather than the perceived nature of the transaction.

Both Woolwich and Kleinwort Benson concerned restitutionary claims against public authorities and should, therefore, be treated as complementary and not contradictory, in the sense that the cases together should be interpreted as recognising alternative claims for the recovery of overpayments from public authorities – one founded on the ultra vires nature of the receipt and the other founded on the mistake of the claimant. The claimant should be allowed to choose whichever claim best suits his or her circumstances.
Indeed, Buxton LJ came close to recognising the significance of the recipient rather than the underlying transaction when he stated that:

It is therefore difficult to escape the conclusion that in Woolwich the House of Lords recognised, or created, a right and a remedy that were specific to the particular circumstances of the demander and of the payer, and which stood outside the main stream of restitution as understood in a private law context.

However he then also went on to reach the unnecessary conclusion that Woolwich constituted a complete code for the recovery of overpaid taxes and so this prevented the claimant from relying on the mainstream ground of mistake of law to secure restitution.
One possible explanation for the decision of the Court of Appeal was identified by Buxton LJ, namely that the justification for restitution under the Woolwich principle and for mistake of law are fundamentally different because they involve different reasons why the payment should be returned, namely the unlawful demand under the Woolwich principle and the mistake of law under Kleinwort Benson . This however, is an irrelevant distinction, because in both cases the restitutionary claim is grounded on the same unifying principle, namely unjust enrichment, albeit with different grounds of restitution .

Thirdly, a consequence of the failure to recognise alternative common law claims for the recovery of overpaid taxes is that the court is depriving the claimant of a restitutionary remedy which would have been available had the transaction been characterised as private, by virtue of preventing an extension of the limitation period. Surely the recovery of overpaid taxes should, at the very least, be just as readily available as other types of payment to a public authority where those payments are mistaken .

Conclusion

We have reached a position where there is a conflict between two fundamental principles. On the one hand we have a fundamental principle of constitutional importance that public authorities are not able to demand or receive ultra vires payments. On the other hand, we have judicial and statutory developments, in the forms of the Court of Appeal in Deutsche Morgan Grenfell and recent Finance Acts, which make the recovery of such payments more difficult by qualifying the limitation period or expanding the defences available to the taxing authorities.

Constitutional principles appear to have been rejected for the benefit of public authorities. Furthermore, the perceived distinction between public law and private law claims are unworkable and unnecessary. It is to be hoped that the House of Lords in Deutsche Morgan Grenfell will recognise that the claimant has a choice as to the ground of restitution on which it relies. The significance of the defendant being a public authority should primarily only be relevant as regards the definition and interpretation of particular defences to such claims.

Bibliography

Charles Mitchell and Paul Mitchell, Landmark Cases in the Law of Restitution (Hart, 2006), essays on Legal History.

Peter Birks, Unjust Enrichment (2nd Ed, Clarendon, Oxford, 2005)

A Burrows, J Edelman and E McKendrick, Cases and Materials on the Law of Restitution (2nd Ed, OUP, Oxford, 2007)

Anderson, Austin, Marketing Your Practice (ABA Section of Law Practice Management (1987)

Bergman, Paul and Bernan Barrett, Sara. How to Represent Yourself in Court, Nolo Press, (19)

Mosten, Forrest S., Operating a Profitable Mediation Practice and Disk of Practice Forms (1999).