2—Woolwich and the Creation of the Public Law Reason for Restitution
2
Woolwich and the Creation of the Public Law Reason for Restitution
THE FIRST CASE to raise sharply the relationship between public law and the law of unjust enrichment was Woolwich Equitable Building Society v IRC,1 which entailed a claim for the return of money from a public body.
The Facts
Until 1985, the tax position of building societies, so far as concerned accounting for tax deducted by a society on interest paid or credited to its members, was regulated by extra-statutory arrangements between individual building societies and the Commissioners of Inland Revenue (IRC) which were formalised by statute in section 23 of the Finance Act 1951 and section 343 of the Income and Corporation Taxes Act 1970. These arrangements meant that building societies had to account to the IRC for lump sums representing the interest paid to members. For the financial year 1985–86, the lump sum paid by Woolwich only took into account the period up to 30 September 1985. No interest was therefore paid for the period from 1 October 1985 to 5 April 1986, the ‘omitted period’. The Finance Act 1985 empowered the IRC to introduce subordinate legislation by way of regulations to alter the mechanics of collecting income tax on building society deposits.2 It was explicitly not to raise extra tax, but ‘transitional provisions’ in the introduced regulations meant that tax was charged for the omitted period in order to prevent the building societies from receiving a windfall. The building societies, however, argued that this was a new tax and was thus beyond the powers granted to the IRC under the Finance Act 1985. Nevertheless, Woolwich paid, under protest, most of the disputed tax (£56,998,220), fearing that if it did not do so it would give the impression to its customers that it could not pay, and this would lead them to withdraw their money.
As soon as the regulations were made, Woolwich had brought proceedings by way of judicial review, seeking a declaration that the transitional provisions were ultra vires. The Treasury Minister promptly responded by introducing a late amendment into the Finance Bill 1986 retrospectively widening the IRC’s regulation-making power to cover the situation, and this became section 47 of the Finance Act 1986. However, deficiencies in the drafting of section 47 encouraged Woolwich to pursue its case3 and the House of Lords unanimously found in its favour on 25 October 1990.4
Once Woolwich had been successful in this first complaint, the IRC agreed to return the principal amount, but they denied any obligation to pay interest unless they had previously agreed to do so. It was this matter which formed the basis of the claim in Woolwich, under section 35A of the Supreme Court Act 1981. Woolwich would only be entitled to interest5 at the court’s discretion if the plaintiff could establish a legal entitlement to the principal sum, so that it constituted a debt. Thus, only if the IRC had had an obligation to repay the principal sum under the law of unjust enrichment could Woolwich get interest on the repayment.
The Background to the Claim
Before Woolwich, success for individuals in such claims was mixed. Some cases, such as Newdigate v Davy,6 Campbell v Hall,7 Steele v Williams,8 Hooper v Exeter Corp,9 Queens of the River Steamship Co v Conservators of the River Thames,10 AG v Wilts United Dairies11 and South of Scotland Electricity Board v British Oxygen Co Ltd (No 2)12 suggested that such money could be recovered as of right, and indeed, this had been argued by Birks13, G Jones14 and Cornish.15 However, other cases suggested that a private law unjust factor such as duress would be necessary.16 For example, in Meadows v Grand Junction Waterworks Co17 the claimants recovered for mistake of fact, while in Sebel Products Ltd v Customs and Excise Commissioners,18 although the claimants succeeded through implied contract rather than through unjust enrichment, the method used was still purely private. In Slater v Burnley Corp,19 Twyford v Manchester Corp20 and Eric Gnapp Ltd v Petroleum Board,21 the unjust factor required was duress, but here there were also the beginnings of a public law element, since it was held that the payments could be recovered if they were paid colore officii.22 This provides an interesting parallel with the relationship between the private law category of wrongs and public law. The starting point in wrongs, as with unjust enrichment, is the Diceyan orthodoxy that the liability of a public body arises on exactly the same basis as the liability of an individual. But, just like the colore officii claim in unjust enrichment, an exception has been made and a specifically public law tort has been created where an official misuses his or her powers (misfeasance in public office).23 Nevertheless, although the colore officii claim did have these public law features, it was still a close relative of the private law ground of duress and some threat, express or implied, to withhold a service or benefit to which the plaintiff was entitled was necessary. A simple threat to sue was not enough to found such a claim,24 and it would certainly not succeed solely on the basis that the demand was ultra vires. The cause of action was thus still very much a private one, even if some account was taken of the greater potential for duress where one of the parties is private and the other public.
A Wholly Private Approach? Potential Unjust Factors
Available to the Woolwich
The question for the Woolwich, then, was whether its case could be brought within these existing precedents, or any of the other existing unjust factors.
Duress or Colore Officii
It is certainly true that the Woolwich had felt compelled to pay the IRC, and indeed Lord Browne-Wilkinson held that:
[A]s a matter of principle the colore officii cases [listed above] are merely examples of a wider principle, viz that where the parties are on an unequal footing so that money is paid by way of tax or other impost in pursuance of a demand by some public officer, these moneys are recoverable since the citizen is, in practice, unable to resist the payment save at the risk of breaking the law or exposing himself to penalties or other disadvantages.25
Thus the concept of ‘payment under implied compulsion’ was ‘in play’.26 Similarly Lord Slynn held that:
Although . . . the facts do not fit easily into the existing category of duress or of claims colore officii, they shade into them. There is a common element of pressure which by analogy can be said to justify a claim for repayment.27
However, Lord Keith held that:
[N]o pressure to pay was put upon Woolwich by the revenue. Woolwich paid because it calculated that it was in its commercial interest to do so. It could have resisted payment, and the revenue had no means other than the taking of legal proceedings which it might have used to enforce payment. The threat of legal proceedings is not improper pressure. There was no improper pressure by the revenue, and in particular there was no duress.28
Lord Goff agreed that:
[S]ince the possibility of distraint by the revenue was very remote, the concept of compulsion would have to be stretched to the utmost to embrace the circumstances of such a case as this. It is for this reason that Woolwich’s alternative claim founded upon compulsion did not loom large in the argument and is difficult to sustain.29
And Lord Jauncey argued that:
Duress to be relevant must be found within the four walls of the transaction. In this case Woolwich would, in relation to the revenue, have been no worse off if they had refused payment of the tax claimed and raised the defence which subsequently proved successful . . .Woolwich are not entitled to recover on the ground of duress.30
This majority viewpoint is also supported in the academic literature.31 None of this is intended to deny that public bodies have even greater power to compel individuals than large companies, or indeed even when the private party is a large undertaking such as Woolwich. The argument is that the elements of the private law colore officii ground must be satisfied and it is difficult to do this when there is no ‘entitlement threat’ or private law compulsion.
Inequality
Birks in particular32 has suggested this factor as a possible explanation for the result in Woolwich and, as McKendrick notes,33 the view received some support from Lord Slynn when he stated that the colore officii cases were based on the fact that the payer and payee were not on an equal footing. Certainly this is an important aspect of the current cases, but the majority decision was not based on the idea of transactional inequality alone. It is clear, particularly from Lord Jauncey’s judgment,34 that in cases such as Morgan v Palmer,35 used as authority for the significance of the ‘unequal footing,’ the inequality was significant to their Lordships only because it allowed the payee to demand payment; it was not itself the reason for restitution.
No Consideration
This ‘unjust factor’ has been the subject of much academic criticism. Although in fact the most significant judicial support for it came from the judgment of Hobhouse J (as he then was) at first instance in Westdeutsche,36 several of their Lordships37 in Woolwich referred to Queens of the River Steamship Co as being authority for recovery where there was ‘no consideration’ and Lord Goff pointed out that in Campbell v Hall38 ‘recovery was stated to be founded upon absence of consideration for the payment’.39 Furthermore there are other cases in the late eighteenth and early nineteenth centuries, of which Dew v Parsons40 is a significant example, which support this approach. Nevertheless, Lord Keith pointed out that the report in Queens of the River Steamship Co contained no citation of authority nor any account of the argument, so that the decision could not be regarded as significant,41 and although Lord Browne-Wilkinson believed that ‘no consideration’ was ‘in play’ in the Woolwich case alongside ‘implied compulsion’, crucially he did not believe that either of those factors was sufficient on its own to found the claim.
There are two reasons why this conclusion is welcome. First, and perhaps most importantly, ‘absence of consideration’ may perhaps not be an unjust factor at all, and its adoption could lead to an abandonment of the whole scheme of unjust factors, or specific reasons for restitution. This is because, were we to adopt ‘absence of consideration’, all the existing unjust factors could be swallowed up into this one ‘reason for restitution’. Such a move would thus in fact be a change to the civilian approach of enrichment without cause outlined in chapter one and discussed in more detail below, in part two. It was noted in chapter one that there is nothing inherently ‘wrong’ with such an approach, nor would it be impossible for English law to adopt it. It was even suggested that there may not be any great difference between the two approaches,42 and that at least Birks and Meier advocate such a change.43 Indeed, Birks in particular thinks that it is public body cases (albeit of a potentially different kind) which necessitate the change.44 Nevertheless, for this area of law to adopt the civilian structure would be a significant intellectual change if not a practical one, and since the advantages and disadvantages of doing so were not considered by Hobhouse J or their Lordships it is unlikely that this is what they intended. This is particularly so given that Lord Goff expressly pointed out that English law has not developed so as to recognise a general condictio indebiti.45
Second, in the first edition of his book, Virgo pointed out that even apart from these structural objections there is another reason for rejecting ‘no consideration’ as the unjust factor on which to found recovery in Woolwich. Rather than focusing on the fact that the contract is void, he believes we should instead be focusing on the reasons why it is void.46 Thus in the cases of payment out by a local authority (as in the swaps cases)47 the reason for restitution he suggests is incapacity, and in the cases such as Woolwich, the reason for restitution he suggests is ‘unauthorised receipt by a public authority’. Both of these are policy-orientated unjust factors that belong alongside other miscellaneous public policy cases of restitution.48
Failure of Consideration49
Similarly, Lord Browne-Wilkinson certainly thought that there was a ‘close analogy’ between failure of consideration and the basis for the claim in Woolwich,50 but this makes it clear that failure of consideration did not apply directly as the unjust factor either. On the contrary, he made it clear that both want of consideration and payment under implied compulsion were ‘in play’.51 Thus, even if failure of consideration reasoning was relevant in Woolwich,52 it could not capture all the relevant aspects of that case.
Mistake of Law
The first point to be made here is that at the time of the decision in Woolwich it was not possible to recover after a mistake of law, only after a mistake of fact. However, even if the House of Lords had wanted to remove this rule in the Woolwich case, rather than waiting for Kleinwort Benson Ltd v Lincoln CC,53 the question did not arise on the facts. It will be remembered that the Woolwich were at no point mistaken as to their legal rights. From the time of introduction of the ultra vires regulations they challenged the tax, and when they did pay they did so under protest. The only mistake, therefore, was on the part of the IRC, not on the part of the Woolwich. Indeed, while there are various dicta in Woolwich casting doubt on the mistake of law rule and hinting at the change that was to come in Kleinwort Benson,54 Lord Goff pointed out that:
[I]f there is to be a right to recovery in respect of taxes exacted unlawfully by the revenue, it is irrelevant to consider whether the old rule barring recovery of money paid under mistake of law should be abolished, for that rule can have no application where the remedy arises not from error on the part of the taxpayer, but from the unlawful nature of the demand by the revenue.55 (emphasis added)
Thus regardless of the independent desirability of mistake of law as a ground for recovery in such cases56 it did not arise on the facts of Woolwich.
Two New Options for Recovery
It can therefore be seen that on its particular facts, none of the existing private law-based unjust factors were available to the Woolwich. If the Woolwich were to win, the House of Lords had two options. It could extend the private law grounds of recovery to cover the case,57 or it could develop a new, public law unjust factor. The majority of their Lordships (Lord Goff, Lord Browne-Wilkinson and Lord Slynn) chose the second ‘public law unjust factor’ option, and at its very narrowest the ratio of Woolwich is that:
a citizen who makes a payment in response to an unlawful demand for tax that was unlawful because of the invalidity of the relevant subordinate legislation has a prima facie right in restitution to the repayment of the money, irrespective of whether the payment is mistaken or made under duress.58
To give effect to Woolwich’s proposition would . . . amount to a very far reaching exercise of judicial legislation. That would be particularly inappropriate having regard to the considerable number of instances which exist of Parliament having legislated in various fields to define the circumstances under which payments of tax not lawfully due may be recovered, and also in what situations and upon what terms interest on overpayments of tax may be paid . . . [F]ormulation of the precise grounds upon which overpayments of tax ought to be recoverable and of any exceptions to the right of recovery, may involve nice considerations of policy which are properly the province of Parliament and are not suitable for consideration by the courts.59
What is the Woolwich Unjust Factor?
Clearly then, Woolwich created a new ‘reason for restitution’. But what exactly is it?
Illegality
One option might be to regard the Woolwich unjust factor as a form of illegality. However, there are several reasons why we cannot simply assume that illegality will, on its own, found a claim following Woolwich. First, of course, it is not clear that illegality can provide a ground for recovery at all; it may only operate as a defence. Both Birks and Burrows, on the other hand, argue that withdrawal within the locus poenitentiae can furnish an unjust factor based on the policy of discouraging unlawful conduct,60 and Burrows would add to this another ground of restitution which exists where the illegality is designed to protect the vulnerable class to which the claimant belongs.61 Put this way, an analogy with this policy-motivated unjust factor seems at first attractive, but even if illegality is potentially an unjust factor, its application to this type of case was rejected by Estey J of the Supreme Court of Canada in Hydro Electric Commission of Township of Nepean v Ontario Hydro.62 Although he was dealing in that case with a situation of mutual mistake as to the law, he held that this ‘cannot be classified as an illegal transaction as neither party has offended any prohibition in law, but rather each party has respectively asked for and paid a charge not included in the statutory term ‘cost’.63
It is arguable that this reasoning does not depend on the presence of a mistake and so applies equally to the Woolwich case. On that basis it could not be said that the Woolwich unjust factor is based purely on private illegality of the kind envisaged by Birks and Burrows, though on the other hand that does not mean that the concept of illegality has nothing at all to contribute to the Woolwich reason for restitution.
Incapacity
Remaining with the idea of ‘policy-motivated unjust factors’, Virgo, in rejecting absence of consideration as an unjust factor, prefers to focus on the underlying policy which removes the consideration.64 In some cases, he argues, this is the policy of continuing to protect those in whose favour the capacity rules were created.65 This would mean that the Woolwich unjust factor belonged either in the category of policy-motivated restitution or in the category of unjust factors vitiating intent. It is arguable, though, that cases of incapacity seem more closely linked to the Woolwich unjust factor than they actually are. First, it should be noted that this type of unjust factor is far more relevant to situations where the public body is the claimant (discussed in chapter three) than it is to the unjust factor in Woolwich, since wherever the incapacity unjust factor belongs, its purpose is to justify restitution to the incapax. In Woolwich on the other hand, the incapacity was the defendant IRC’s. Further, as Birks points out, claims against companies or minors are not based on incapacity but on total failure of consideration,66 the question of capacity only being relevant as a defence. It thus appears that even for public-body-as-claimant cases the category of incapacity is not secure. Nevertheless, as with illegality, although we cannot fit the result of Woolwich neatly into the private law concept of incapacity, this does not mean that the concept has no role at all to play in explaining what the reason for restitution in Woolwich really was.
Absence or failure of basis
Similarly, as noted above,67 there are several reasons why absence of basis should not, by itself, be regarded as explaining the reason for restitution in Woolwich. As far as failure, rather than absence of basis is concerned, we have already seen that the court in Woolwich did not feel confident basing its decision on total failure of consideration alone,68 and from a more general point of view, when cases of unjust enrichment in which the public body may be the claimant are discussed in chapter three it will be noted that in any case the ‘failure of consideration’ approach ignores the important question of why the consideration has failed.69 Nevertheless, it is no coincidence that the principal cases cited in support of ‘absence of consideration’ all come from the public law context.70
Inequality
Finally, Birks has, on more than one occasion,71 suggested that the true basis for recovery in Woolwich