5—Defences

5

Defences

What General Implications does the Hybrid Nature of
the Reason for Restitution have for Defences?

ONE IMPORTANT DIFFERENCE between the core public law ‘remedies’ of declaration, injunction, certiorari, prohibition and mandamus on the one hand, and restitution, contractual responses, responses to torts and habeas corpus on the other, is that the former are discretionary, and the court can withhold them if it thinks fit.1

Birks argues that we should move away from using the word ‘remedy’, motivated in part by his abhorrence of what he identified as the fifth potential meaning of the word, discretionary remedialism, which he argues would lead to ‘rightlessness’.² Nevertheless, even in private law, as Birks notes, ‘[m]any judicial orders are weakly discretionary’.³ However, the rules for the exercise of that discretion have been developed over many years.⁴ The same is true of public law. The court does have a discretion whether to grant any of the possible responses such as certiorari, but it is not nonsense to speak of the claimant having a ‘right’ to them, and public law does not contain this state of ‘rightlessness’ any more than private law.⁵ Indeed, Wade and Forsyth have been judicially approved in arguing that discretion should be limited to the sphere of ‘remedies’,⁶ further evidence that ‘remedies’ in public law can be equated with ‘responses’.⁷

Various factors operate to determine whether the public law ‘remedies’ will be granted.8 For example, in R v Secretary of State for Social Services, ex p Association of Metropolitan Authorities (ex p AMA),⁹ relief was withheld because there would be serious public inconvenience in upsetting the impugned order. Such considerations can, then, be seen as the corollary to the ex p Datafin criteria discussed in Chapter 1.¹⁰ On the one hand, public bodies wield a different kind of power from that held by private parties. Such power can be monopolistic but must be used for the public good.¹¹ On the other hand, however, any responses granted by the law in cases involving public parties can have immediate implications for the public good in a way that responses granted to private parties cannot. It is true that a change in private law precedent can have ‘public policy’ implications and can raise concerns about the opening of ‘floodgates’ but when it is private money which will flow through these floodgates, the concerns are different from those which apply to public revenue. A decision taken under public law, supposedly in the interests of the public at large, cannot simultaneously be allowed to harm those interests. The same reasoning does not apply in private situations.

This explains why it is that the public law responses are discretionary. The fact that the private law responses are so much less so is again, it is submitted, due to the Diceyan orthodoxy. If a public body was behaving purely privately in contracting, doing wrong, or becoming unjustly enriched, then according to this orthodoxy there is no need for the response to take account of public law considerations.¹² However, it has been established here that this ‘purely private’ account is not satisfactory when there are two events contained within the cause of action, one of which is public. A practical example of this comes from the fact that very different concerns are raised by those who have considered the ‘swaps’ cases from the public law point of view. Largely they focus on the Hazell v Hammersmith and Fulham LBC¹³ decision, and the original finding of invalidity. They suggest that this case has stifled the private finance initiative, and made it harder for local authorities to deal with banks, as a result of the commercial uncertainty generated by Hazell and the subsequent litigation.¹⁴ However, these arguments necessarily extend also to the ‘mopping up’ process performed by the grant of restitution in these cases, and suggest that if restitution were to be a public law response alongside the prerogative remedies it might not, under the ex p AMA decision, have been granted.15

A further suggestion for future reform is therefore that, once the public law reason for restitution is given precedence over other unjust factors, the availability of the restitutionary response in such cases should be different from purely private single event cases. In other words, the hybrid nature of the claims and the consequent hierarchy of unjust factors suggested here may have important implications for the operation of defences and other related arguments.

Two sets of such defences and related arguments must be considered. On the one hand, the ordinary private law defences such as passing on or change of position can potentially play the same role here as in any other part of the law of unjust enrichment. However, there is also a series of defences and related matters which may be relevant as a result of the public law nature of the claims, or possibly of one of the parties. These include: the defence of ‘fiscal disruption’; prospective overruling; subsequent legislation; and the Law Commissions’ special defence of ‘failure to exhaust the statutory remedies’.¹⁶

All the defences can be altered either in favour of the public body, or in favour of legality. For example, the defence of ‘fiscal disruption’ could apply whenever a public body is a defendant in any kind of unjust enrichment claim. Or on the other hand, this defence could be rejected, and even the usual defences could be restricted in their application, when there is a public law unjust factor claim, in order to promote legality. The argument here is, first, that it is the hierarchy of unjust factors and the consequent monopoly of the public law reason for restitution which should affect the application of the defences. The variation of private law defences and the introduction of public law defences should only take place when public law is the reason for restitution and, as has been argued here, when it can be made out on the facts this unjust factor will be used in preference to any other. As a result, since public law unjust factor cases include Westdeutsche, Woolwich and Auckland Harbour type situations, it is also proposed, second, that in many cases alterations to existing defences, or creation of additional defences, should apply uniformly whether the public body is the defendant or the claimant.

Third, while the choice between altering the defences in favour of the public body and altering them in favour of legality may be a new choice for unjust enrichment lawyers,¹⁷ it should be noted this is a familiar problem for public lawyers. Very similar questions arise in relation to the discretionary nature of public law responses, illustrated by ex p AMA above,18 and there are several factors which will mean that when a private party applies for a public law response through judicial review the response may be denied. These are: waiver; bad faith; the premature nature of the application; the absence of any injustice; the impact on third parties; the impact on the administration; the fact that the same decision would have been reached in the absence of the public law event; the ongoing best efforts of the respondent authority to be legally compliant; the fact that the error is substantially cured; the fact that the problem is now moot; and, as noted above, serious public inconvenience in upsetting the impugned order. Craig argues in addition that since we are willing to qualify the ultra vires principle against the individual in such circumstances, we should also be willing to qualify it in favour of private parties when they have suffered loss through relying on an ultra vires representation.¹⁹ These matters are an important part of public law, but should now also be borne in mind when examining the defences available to unjust enrichment claims involving public bodies. The important thing is that in public law there are reasons why the response may be denied entirely, or in part. Similarly, in the specific public law unjust enrichment cases at issue here, the response to the ultra vires event may be denied entirely, or in part, depending on the precise method of application, if any, of each of the defences.

It is necessary here to make it clear exactly how and why the above alterations to these defences, if accepted, would apply. First, it should be noted that the two considerations outlined above, legality and protection of public bodies, will not always conflict. Protection of public bodies against disruption contrary to the greater public interest will always favour the public body, but promotion of legality can favour either party. Thus where the public body is the claimant, it could potentially claim that the defences should be altered in its favour for both reasons. Where it is the defendant, on the other hand, the public body will only be able to claim disruption, and the private party could potentially argue that the defences should be altered in its favour for the promotion of legality. Second, it should be noted that while the promotion of legality can therefore favour either party, it will always favour the disapplication of defences.²⁰

Thus it is necessary to examine whether, and if so how, each of the defences needs to be altered in order to strike the correct balance between the public and private aspects of the dual event claims. The operation of each of the private law defences suggested by the unjust enrichment event must be compared with the reasons why discretion may be exercised against the grant of a response in public law. In other words, the ‘qualifications to the ultra vires principle’, which arise in pure public law must be compared with those which arise in the public law unjust enrichment dual event cases through the existing private law defences to unjust enrichment. The reverse inquiry must then be conducted in relation to the specialised defences applicable only to public law reason for restitution cases. The question here will be whether the public law defences unduly restrict the law’s access to the private event of unjust enrichment.

One case which has come close to examining some of these questions is R v Tower Hamlets LBC, ex p Chetnik Developments Ltd.21 In this case, the applicants had redeveloped a site to provide two warehouse units. It was a condition of the requisite building construction consent issued under the London Building Acts 1930–1939 that the buildings should not be occupied until consent to the proposed user had been obtained, and for a while the buildings were not occupied. During this time the applicants paid rates on the buildings, despite the fact that General Rate Act 1967 provided that ‘no rates . . . [would] be payable . . . for . . . any period during which (a) the owner is prohibited by law from occupying the hereditament or allowing it to be occupied’.²² Obviously, this would have exempted the applicants from such payments. However, unlike the other cases discussed in this investigation, the applicants did not bring an action based on the common law of unjust enrichment.²³ Instead, they had to apply under section 9 of the General Rate Act 1967, which gave the rating authority discretion to refund the whole or part of the money, a discretion which the rating authority refused to exercise in the applicants’ favour.²⁴ This case is therefore not one which should, on the argument made here, be considered as a dual event case. The recovery in ex p Chetnik is based on statute rather than on the common law event of unjust enrichment, so that there are in fact two sequential public law events: the mistaken payment and therefore receipt of the money, followed by the refusal to exercise the discretion to repay, rather than two simultaneous events, one a public law event and the other a private law event of unjust enrichment. However, it was clear, at least to Lord Goff, that the General Rate Act 1967 created ‘a statutory remedy of restitution, in the circumstances specified by the section, to prevent the unjust enrichment of the rating authority at the expense of the ratepayer’.²⁵

It is submitted that when his Lordship states that ‘the general principles of the law of restitution can provide useful guidance in these cases’,²⁶ put into my terms he is actually suggesting that two events are relevant: the public law event of the rating authority’s refusal to exercise its discretion in favour of the ratepayers; and the private law event of unjust enrichment. This still does not parallel the case exactly with the dual event cases considered here, because the right of recovery was still to be derived from section 9 of the 1967 statute. Nor was it the case that the court was considering public law as the reason for restitution; indeed the only relevant ‘unjust factor’ considered was mistake of law.27 However, their Lordships did consider factors which could influence the exercise of the statutory discretion to repay and to this extent the case is relevant to the current investigation and should be considered under the appropriate headings below.

Time Limits

One key application of these suggestions, and a matter which bridges both private and public law defences and related issues, is the question of the time limits applicable to claims involving public law events. Where the public law reason for restitution overlaps with another unjust factor, it has been argued that the former should prevail, but it has also been seen that some cases can only use mistake of law because only then can they take advantage of a longer time limit.28 Yet even in those cases the arguments in favour of recognising the public law nature of the claim through the public law reason for restitution still apply. This suggests that rather than interpreting such cases controversially as involving mistakes of law in order to evade the usual statutory protection for legal certainty, thus losing sight of their public law nature and implications, it would be better to have one time limit applicable exclusively to all claims where a charge or payment is found to be beyond the powers of a public body and either the same claimant or another wishes to rely on that fact to reclaim money. In other words, it would be better to tailor the time limit to the relevant cause of action, rather than allowing that cause of action to be driven in an inappropriate direction by time limit concerns. In one sense this has already happened. On 8 September and 11 November 2003, the IRC announced not only that it would appeal the Deutsche Morgan Grenfell decision,²⁹ but also that it would introduce a Finance Bill which will stop section 32 of the Limitation Act 1980 from applying to any ‘taxation matter under the care and management of the Commissioners of Inland Revenue’. It stated that the Bill would apply to ‘any action for relief from the consequences of a mistake of law, whether expressed to be brought on the ground of mistake or on some other ground (such as unlawful demand or ultra vires act)’.30

This was duly enacted as and 321 of the Finance Act 2004, and further reinforced by the Finance Act 2007 opening the way for the hierarchy of unjust factors to be fully established: where the public law unjust factor overlaps with another ground of restitution the former should prevail and there would be no cases involving public law events where the public law reason for restitution is unavailable and yet another could be used. However, the problem was that these provisions were not compliant with EC law. When time limits are applied to cases involving questions of EU law, they must not prevent the remedy from being effective to protect the relevant EU legal rights and must be equivalent to the rules applicable in purely domestic situations.³¹ It seems likely in the light of the decision in Edis v Ministero delle Finanze³² that a six year general time limit would comply with these requirements. However, the problem was that the 2004 legislation announced on 8 September 2003 and the 2007 Finance Act both had retrospective effect and did not contain any transitional provisions.³³ Thus, in the light of Marks and Spencer plc v Commissioners of Customs and Excise³⁴ and Grundig Italiana SpA v Ministero delle Finanze,³⁵ these factors were held in the FII case to create a breach of the duty to provide an effective remedy as a matter of EC law.³⁶ It would, of course, be possible to provide for this category of claimants in transitional provisions and as long as their time limit was not ‘too short’ this ought to comply with the requirement of effectiveness. Certainly, it would be possible to introduce legislation which would apply the six year time limit across the board to charges yet to be paid, because this would be wholly prospective.

Marks and Spencer and Deutsche Morgan Grenfell are not the only instances, of course, in which the Revenue has sought to impose a retrospective time limit. After Woolwich³⁷ itself, the government enacted section 53 of the Finance Act 1991 retrospectively to validate the Woolwich tax, save in respect of anyone who commenced proceedings before 17 July 1986. On 16 July 1992, section 64 of the Finance (No 2) Act 1992 entered into force, providing, with retrospective effect, that the Treasury orders ‘shall be taken to be and always to have been effective’. Many felt this legislation was unfair, especially since, as Jordan notes, calls for retrospective legislation in the swaps cases where the defendants were public bodies ‘fell upon deaf ears . . . Depending how one looks at it, this may or may not be viewed as consistent behaviour’.38

Three building societies excluded by this legislation, the National and Provincial, the Yorkshire and the Leeds, therefore challenged its validity, this time in Strasbourg, alleging violations of Article 1 of Protocol 1 to the ECHR (because the effect of the legislation was to deprive them of their possessions); of Article 6(1) (because it deprived them of a fair hearing before a court); and Article 14 (because they had been subjected to discriminatory treatment). The Commission held (by 13 votes to 3) that while the building societies did have ‘possessions’, the fair balance between the demands of the general interest of the community and the protection of the fundamental rights of the applicants had not been upset.³⁹ Nor had there been a violation of Article 14 (14 votes to 2) because Woolwich alone had incurred the costs and run the risks of challenging the regulations, so there was an objective and reasonable justification for treating the applicants differently. Finally, there had been a violation of Article 6(1) (9 votes to 7), because the rights at issue in both the restitution and judicial review proceedings were ‘civil’, and the subject matter was clearly pecuniary. The state had thus intervened through the legislature in a manner that was decisive to ensure that the proceedings were resolved in its favour, and had deprived the applicants of their right to obtain a determination of their civil rights and obligations following a fair hearing before a court.

The European Court of Human Rights (ECtHR), however, found against the building societies.⁴⁰ On 23 October 1997, the ECtHR agreed that there had been no violation of Article 1 of Protocol 1, or of Article 14, but it also held that there had been no violation of Article 6(1). While the ECtHR was mindful of the dangers of retrospective legislation, the authorities had not interfered with pending legal proceedings to which they were a party. The applicant parties must reasonably be considered to have anticipated that the Treasury would seek Parliament’s permission to cure the defects in the Regulations, and the three building societies had been trying to pre-empt this. The extinction of the restitution proceedings was a significant consequence of the legislation, but the applicant societies were not its particular targets. Finally, while section 64 was intended to bring an end to the proceedings brought by the three societies, these proceedings were really the next stage in the effort to frustrate the original intention of Parliament, and the applicants could not really expect the Treasury to remain inactive. Nor had the judicial review proceedings reached the stage of an inter partes hearing.41 It is thus clear that the ECHR places fewer limitations on the government’s power to enact time limits than does the EU.

Turning to the public law context, two sets of provisions cover the time limits for applications for judicial review. Rule 54.5(1) of the Civil Procedure Rules (CPR) provides that the claim form must be filed promptly and in any event not later than three months after the grounds to make the claim first arose, though even shorter time limits can be set out in specific contexts (rule 54.5(3)). This limit can only be extended by the court pursuant to a general power contained in CPR 3.1(2)(a).⁴² Section 31 (6) of the Supreme Court Act 1981 provides that where the High Court considers that there has been undue delay in making an application for judicial review, the court may refuse to grant leave for making the application, or any relief sought on the application, if it considers that the granting of the relief sought would be likely to cause substantial hardship to, or substantially prejudice the rights of, any person or would be detrimental to good administration. It is clear that a claim can fail for lack of promptness even if it is brought within three months,⁴³ though it has been argued that this leads to uncertainty over the exact time limit in any case and that this could breach the ECHR.⁴⁴ Where the claim is not prompt enough for the purposes of CPR 54.5(1)(a) it will also fail for undue delay under section 31 (6) of the Supreme Court Act 1981,⁴⁵ even if the court has extended the time under CPR 3.1(2)(a). The court will then have to decide whether to refuse permission to bring the claim (if not yet granted) or relief at the substantive hearing of the claim, taking into account hardship to third parties and detriment to good administration. However, where third party interests are insufficient to tip the balance the other way, the interests of good administration suggest that the abuse of power should be corrected and the claim should be allowed.⁴⁶ In contrast to these short public law time limits, as was noted above,⁴⁷ the time limit for purely private unjust enrichment actions is six years and this can be further extended because the time will not begin to run until a decision reveals the ultra vires event.

If we are to have a new, universally applicable time limit which cannot be evaded through denial of the public law elements in favour of the private law aspects of the claim, then it must fall between these two extremes. There are various arguments to be considered in choosing the new limit. On the one hand, it might not be appropriate simply to split the difference between the two time limits and choose 33 months as the new limit, because this would not be to give due weight to the extreme shortness of the public law limits and measuring the limit in years could thus have the effect of favouring the private law viewpoint. It is also arguable that while other defences relate to the unjust enrichment claim as a whole, or to an aspect of that claim other than the unjust factor, the time limit is more closely related to the reason for restitution than it is to any of the other, private, aspects of the claim. After all, it is the emergence of the reason for restitution that will prompt the construction of the claim as a whole. Thus, while it may be necessary in purely private cases to allow more time for the parties to realise that the consideration has failed, or that their consent has in some way been vitiated, any party transacting with a public authority knows that they are dealing with a limited-capacity entity and ought, therefore, to check before or immediately after the transaction that the tax was validly levied, the grant validly paid, the contract validly entered into, etc. Further support for short time limits comes from La Forest J in Air Canada v British Columbia,48 and the idea was contemplated by Lord Goff in Woolwich.

On the other hand, Lord Goff concluded that ‘such draconian time limits [as those found in German law] may be too strong medicine for our taste’.⁴⁹ Certainly, against a particularly short limit it should be noted that the current public law rules are the subject of criticism. Craig argues that before 1977, the longer time limits did not cause problems and that in fact the short time limits can lead to an increase in litigation as claimants hurriedly submit applications for judicial review, lest they should run out of time by considering their action more carefully.⁵⁰ He concludes that there are other techniques (as will be discussed below⁵¹) which can promote legal certainty and suggests that a discretion on the part of the court is perhaps a better solution than an absolute time limit, since, as Virgo points out, any such time limit will inevitably be somewhat arbitrary.⁵² Such ‘fact-sensitivity’ would also be more likely to comply with the requirements of the ECHR as being a more proportionate approach to balancing the requirements of legal certainty against the rights of the claimant,⁵³ provided that the discretion only operated in favour of the claimant to extend the time limits.

The Law Commission originally favoured the existing six years for its statutory scheme,⁵⁴ but in a later Consultation paper⁵⁵ it set out five basic options for a new core regime. Of these, it favoured a general limitation period of three years to run from when the claimant knows, or ought reasonably to know, that he has a cause of action.56 There would also be a ‘long-stop’ of 10 years from the date of the act or omission giving rise to the claim, regardless of discoverability. However, this regime would apply to claims in contract, tort and for restitution,⁵⁷ which would mean that a set limitation period applied equally to all possible unjust factors,⁵⁸ and to ‘actions against public authorities’⁵⁹ as well as private parties, whereas it has been argued here that special considerations might apply to situations where the unjust factor is a public law event and this should at least be considered before a universal time limit is created.

Alternatively, there is some academic commentary currently in favour of a limit of two years.⁶⁰ This idea of a two to three year time limit which begins to run from the date of payment and, like the public law time limits, is only extended in exceptional circumstances, would certainly provide one solution. Of course, such a time limit would ultimately be subject to the EU principle of effectiveness, and of course all such proposals are somewhat dependent on the future development of that principle. However, it does not appear as if at present this suggestion would contravene EU law. The applicable rules will be discussed further in chapter eight,⁶¹ but there is no suggestion that a two to three year time limit proposed here would be imposed retroactively⁶² and it would not be specifically targeted at the effects of a particular decision of the ECJ.⁶³ Nor does there seem to be any reason to conclude that two to three years is too short a period to be ‘effective’ in principle. In Edis,⁶⁴ a three year time limit was held to be reasonable for reclaiming charges paid but not due as a matter of EC law, and in Recheio-Cash and Carry65 the Court held that nevertheless it followed from Edis

and the Court’s settled case-law that the Member States remain at liberty to fix longer or shorter periods for repayment of sums paid though not due, on condition that they do not render virtually impossible or excessively difficult the exercise of rights conferred by the Community legal order.

In this instance, a period of 90 days reckoned from the end of the period allowed for voluntary payment of the charges must be considered to represent a sufficient length of time to enable the taxpayer to take the decision to bring an action for annulment in full awareness of all the facts and for that purpose to gather all the matters of fact or law required.⁶⁶

Thus, a three year time limit certainly appears to be compatible with EU law on the basis of Edis, and a two year limit may also be acceptable. However, while it is possible to have a time limit this short, in the light of Schedule 39 of the Finance Act 2008, it seems likely that a limit of four years would be preferable. According to that schedule, from the point of view of the private claimant,⁶⁷ measures came into effect from 1 April 2009 to standardise the general time limits across income tax, capital gains tax, corporation tax, VAT, and stamp duty land tax, at four years. A similar long stop of four years is contained in section 100 and schedule 52 of the Finance Act 2009 and will come into effect from 1 April 2010. This demonstrates that a four year time limit can be operated without undue hardship to public finances and thus suggests that it would not be undesirable to extend it across all public body claims of the kind discussed here. If a shorter time limit could be considered to be compatible with EU law then it certainly seems likely that this longer four year limit would be without problems on that front. Finally, while of course tax cases in which the public body is the defendant are only one context in which the public law reason for restitution may arise, this proposed consistency between the statutory tax context and the common law would be advantageous, since it would tend to reduce the impetus to seek one method of redress rather than another, and thus perhaps lead to an increase in efficiency and a decrease in litigation over the appropriate route for recovery.⁶⁸

In terms of the date from which the time limit begins to run, it is true that in Preston v Wolverhampton Healthcare NHS Trust⁶⁹ the ECJ held that where the claimants were employed under temporary contracts, a time limit which ran for six months from the end of each contract rather than from the point at which that series of contracts (and thus the ongoing stable employment relationship) was interrupted, rendered the exercise of the Treaty right excessively difficult and was therefore precluded by EC law. Similarly, in Manfredi v Lloyd Adriatico Assicurazioni SpA70 the Court held that:

A national rule under which the limitation period begins to run from the day on which the agreement or concerted practice was adopted could make it practically impossible to exercise the right to seek compensation for the harm caused by that prohibited agreement or practice, particularly if that national rule also imposes a short limitation period which is not capable of being suspended.

In such a situation where there are continuous or repeated infringements, it is possible that the limitation period expires even before the infringement is brought to an end, in which case it would be impossible for any individual who has suffered harm after the expiry of the limitation period to bring an action.⁷¹

It might thus be suggested that any national time limit could only begin to run from the date of the judgment invalidating the relevant tax or charge, since otherwise here too the limitation period could ‘expire even before the infringement was brought to an end’. Ultimately, as noted above, this would be a matter for decision by the ECJ, but on the other hand, it does not seem impossible that a national time limit could begin to run sooner than that. In Recheio-Cash and Carry, the limitation period was permitted to run ‘from the end of the period allowed for voluntary payment of the charges’,⁷² and in Edis, the permissible period ran from the date of payment itself. It may therefore be that the keys to the Manfredi judgment were, first, the specific findings that the time had been allowed to run from the date on which the illegality first occurred, second that this was ‘particularly’ problematic ‘if that national rule also imposes a short limitation period which is not capable of being suspended’,⁷³ and third that as a result of the time beginning to run from the date on which the agreement was concluded, it would be possible for individuals to suffer ‘harm after the expiry of the limitation period to bring an action’.⁷⁴ On the other hand, the time limit imposed here would run, not from the date on which the tax was imposed, but the date of payment. Second, as explained above, it would not be excessively short by the ECJ’s own reasoning, and third, there would be no question of any ‘individual suffer[ing] harm after the expiry of the limitation period to bring an action’, because the suffering of the harm would itself be the event triggering the running of time. It therefore appears that the limit proposed here would be compatible with EU law, though the decision ultimately would rest with the ECJ.

Private Law Defences

Change of Position

In English law this defence was introduced in Lipkin Gorman v Karpnale Ltd75 by Lord Goff who held that:

In these circumstances, it is right that we should ask ourselves: why do we feel that it would be unjust to allow restitution in cases such as these? The answer must be that, where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution.⁷⁶

In order to establish the precise scope of the defence in relation to the cases at issue here, it is necessary to clarify six points: whether the defence can be used by public bodies at all; whether its operation upsets the balance between the public and private law aspects of the claim; the causal link required between the claimant’s payment and the defendant’s disenrichment; whether it matters that the public body can in any event simply raise taxes to recover the money it must pay out; the required chronology of the enrichment and change of position; and finally, the role of good faith or fault.

The first question only concerns some of the relevant claims, because Lipkin Gorman itself established that the defence can be used by private parties. However, it is important to determine whether it can also be used when the defendant is a public entity.⁷⁷ It is true that in ex p Chetnik their Lordships in the end concluded that the statutory equivalent of the change of position argument should not succeed in a public body context. However, it is clear from Lord Bridge’s judgment that he did not think section 9 of that particular statute permitted him to allow such an argument and the court was not examining whether change of position should be a defence to dual event public law unjust enrichment claims of the kind investigated here. It was considering whether change of position reasoning was a relevant consideration to be taken into account by the rating authority in the exercise of its statutory discretion to refund rates. Far from being an authority against the suggestion made here that change of position reasoning could apply to public law unjust enrichment cases, ex p Chetnik arguably provides support for that argument. Lord Bridge thought the argument deserved ‘anxious scrutiny’ and admitted that he was ‘initially much impressed by this . . . line of argument’.⁷⁸ In a common law public law unjust enrichment case, therefore, free from the constraints of that particular statute, the courts could in principle apply the defence and indeed in Westdeutsche both Hobhouse J and Lord Goff made it clear that the defence of change of position is capable of applying against a claimant who seeks restitution from a public authority, provided that it is made out on the facts.79

Similarly, in FII,⁸⁰ Henderson J held that he could ‘see no reason in principle why the defence of change of position should not be available to the Revenue, or indeed to any other category of defendant’,⁸¹ and confirmed that it would apply to some of the claims in that case, albeit that it is not wholly clear from the judgment which these were.⁸² It is apparent that he may have had in mind claims arising more than six years previously, since HMRC’s concession on the change of position defence in FII only extended to so-called San Giorgio claims for tax paid (or other enrichments) within the previous six years. However, it is arguable that even these earlier claims ought to be regarded as falling under San Giorgio. Given the principle of equivalence laid down in Rewe-Zentralfinanz GmbH v Landwirtschaftskammer für das Saarland,⁸³ if national law provides a means of recovering taxes or other enrichments paid more than six years previously, it would be difficult to argue that EU law did not require the same ‘remedy’. It is particularly odd that these earlier claims, relying on mistake of law to extend the time limit, should not be regarded as San Giorgio claims, when the whole essence of the mistake of law was that the tax had been lawful when in fact, as a matter of EC law, it was not.⁸⁴ Even more strangely, it was Henderson J himself who had held that the San Giorgio principle required use of the mistake of law ground and that the Woolwich principle alone could not found recovery, and yet the only circumstances in which this is true are those in which it is necessary to rely on the extended time limit under the Limitation Act 1980. It is hard to see, therefore, how any of the claims in FII could be regarded as falling outside the San Giorgio principle and thus, by implication, outside HMRC’s concession.

If the defence is thus available in principle we reach the second question: whether it unduly restricts the law’s access to and reversal of the ultra vires event. This broader question arises whether or not the defendant is the public body and can apply equally where the public body has made an ultra vires payment which it now seeks to reclaim from a private party. By analogy with the statutory context of ex p Chetnik, could a court decide that to allow the defence would defeat the purpose of the ultra vires rule in a particular context?85 One such context is obviously a situation in which the relevant charge was beyond the powers of the public body as a matter of EU law. This issue was considered in the FII case,⁸⁶ which concerned tax provisions which had been found to be in breach of the EC free movement rules.⁸⁷ As Henderson J noted, the argument was novel in that case in that there had been no previous case in which the Revenue or any other government department had sought to rely on the defence,⁸⁸ thereby providing further support for the argument made above that ex p Chetnik Developments does not constitute binding authority on this point. However, the matter was not fully argued in FII either, because the Revenue had accepted that the defence could not apply in relation to ‘ Woolwich-based’ claims and Henderson J took this concession as applying to any other reason for restitution on which the claim was based instead.⁸⁹ The reason for this concession was that the change of position defence was thought to be a breach of the requirement to provide an effective remedy for breach of EC law,⁹⁰ but it is not clear that the Revenue should have given in so easily on this matter. Henderson J’s grounds for accepting the point were first, that while EU law does allow for the setting of reasonable time limits for claims and for the defence of passing on

there is, however, no precedent for a defence of this nature in a case involving direct taxation and breach of one of the fundamental freedoms, and the court has adopted a robust approach in holding that conflicting rules of national law must be disregarded if they would prevent full recovery of an unlawful tax. So, for example, in Hoechst⁹¹ the ECJ expressly ruled that the so-called Pintada⁹² principle of English domestic law, as it was then understood, could not bar recovery on the footing that at the date of issue of the writ no principal sum was outstanding . . . Similarly, in a Danish case,93 the ECJ held that Denmark could not refuse to make a repayment on the basis of a settled law defence available under Danish law.⁹⁴

He later confirmed this view in F J Chalke Ltd and AC Barnes (Wokingham) Ltd v The Commissioners for Her Majesty’s Revenue and Customs,⁹⁵ holding that ‘to allow the defence would not recognise, but would infringe, the principle of effectiveness’,⁹⁶ and pointing to the statement in Weber’s Wine World v Abgabenberufungskommission Wien⁹⁷ that there was ‘only one exception’ to the obligation to make repayment,⁹⁸ namely the passing on defence.

Examining each of these arguments in detail, first, while it may be true that the ECJ has ‘adopted a robust approach in holding that conflicting rules of national law must be disregarded if they would prevent full recovery of an unlawful tax’, there is a clear distinction between the change of position defence on the one hand and, on the other, the settled view of the law defence and the Pintada principle, in that change of position does not prevent recovery altogether, it simply reduces it. Indeed, even on this front, as Henderson J himself points out, the ECJ still permits the defence of passing on, which can completely prevent recovery, as long as the burden of proof is not placed on the claimant to disprove that the charge has been passed on.⁹⁹ It is therefore difficult to see why the partial defence of change of position should be so objectionable to the principle of effectiveness when this potentially full defence is not. Second, while FII may involve direct taxation and breach of one of the fundamental freedoms, the fundamental freedoms were no less at stake in the cases on passing on, and indeed if anything direct taxation is still thought to remain more within the competence of the Member States than other areas.¹⁰⁰ Third, it is also clear that, as Henderson J notes, in addition to the passing on defence EU law permits the setting of time limits provided that they are reasonable and non-wholly-retroactive.¹⁰¹ As noted above, the reasoning behind the setting of a time limit is essentially the same as that behind the change of position defence; both are concerned with promoting legal certainty. When they apply, time limits also provide a complete defence to the claim.¹⁰² Again, therefore, it is difficult to see why a partial defence for the promotion of legal certainty should be objectionable when a full defence for that purpose is not. It is perhaps surprising, then, that the Revenue did not even ask for an Article 267 TFEU (ex 234 EC) reference to be made to the ECJ on the compatibility of the change of position defence with the principle of effectiveness, especially given first, that other references will in any case need to be sent concerning the FII case,103 and second, that so much of the claim is now based on explicit dicta from the ECJ.¹⁰⁴ Indeed it is not impossible that the reason that passing on (and time limits) represent the ‘only exception(s)’ to the obligation to repay is simply because the ECJ has so far not been asked to rule on the change of position defence.

Finally, further evidence for the ECJ’s commitment to legal certainty comes from the reverse fact situation (in which the public body is the claimant and the private party the defendant) in the form of the legitimate expectations doctrine. Legitimate expectations are closely related to the concept of estoppel, as is the defence of change of position, as will be seen immediately below. All have a common root in the promotion of legal certainty, and the prevention of retroactivity.¹⁰⁵ It is thus submitted that the idea that change of position should be allowed to qualify the ultra vires principle need not be peculiar to private law, and the application of this defence is thus not an example of the private law event restricting the law’s access to the public law event, or of a national rule being permitted to breach the EU principle of effectiveness. It is true that currently in English administrative law, ultra vires representations will not generate legitimate expectations,¹⁰⁶ unless, for example, the representation was intra vires the body as a whole but just ultra vires the particular agent who made it.¹⁰⁷ However, the same is not true of other systems, and in particular the EU does allow legitimate expectations to be upheld even where this would limit the reversal of the ultra vires action,¹⁰⁸ and it is arguable that this should be the case in England too.109 Thus, where the public body is the claimant there is nothing unusual, at least as a matter of EU law, about allowing the need for legal certainty to qualify the need to correct the unlawful action and, as will be seen in chapter eight, precisely this reasoning has already been accepted by the ECJ in unjust enrichment cases.¹¹⁰ There is thus no reason in principle why this reasoning should not be applied more generally, in English law and to situations where the public body is the defendant. Finally, given that at all times Henderson J made it clear that the change of position remained ‘live’ in relation to all the claims in the case which did not fall under the EC San Giorgio principle,¹¹¹ the result of his decision is to set up precisely the same kind of disparity between EU and domestic claims that Lord Goff was so keen to avoid in the Woolwich decision.¹¹²

However, it will be remembered that in part this reasoning that change of position is compatible with EU law depends upon change of position being a partial defence. It is true that the ECJ has also accepted some total defences in this context, but none of these are directly analogous to a complete defence based on change of position. Time limits share change of position’s occupation with legal certainty, but they do allow for some recovery during the running of the relevant time. Similarly, legitimate expectations could potentially be a complete defence based on legal certainty, but as noted above, this tends to operate against public bodies rather than for their benefit. While passing on can in principle constitute a complete defence, as will be noted further below, it is very difficult to prove and does not prevent any claim from being brought, only the claim brought by that particular claimant rather than those to whom the charge was passed on. If change of position were on the facts to provide a defence to the whole of the claim brought, it is not impossible that the ECJ would accept this by analogy with its reasoning based on legitimate expectations, but there is no question that this situation would come closer to the defences the ECJ has previously rejected, such as a defence based on the view of the law being settled or prospective overruling where this has been refused on the facts of a given case.113 Thus although the defence is in principle perfectly compatible with the EU principle of effectiveness, whether or not it is compatible in practice will depend on its application to the facts of a given case, and the precise extent to which it would deny the claim in that case. Should it operate to deny the claim completely it would be much more likely to be incompatible with EU law.

This in turn relates directly to the third issue, that of the causal link between the enrichment and the change of position. The narrowest potential view of this link comes from the Canadian Supreme Court in Rural Municipality of Storthoaks v Mobil Oil Canada Ltd¹¹⁴ and confines the result of the defence to specific matched items of income and expenditure. However, as the Law Commission points out:

It will always be difficult for a public authority, and especially for the Crown, to show that it has undertaken items of expenditure other than those which it would in any event have undertaken on the strength of a particular tax receipt. The spending plans of revenue raising public authorities, and particularly those of the Crown, are generally decided in principle several years in advance of the taxation year to which they relate.¹¹⁵

In general, academic opinion supports the view that this will be the result of the rule,¹¹⁶ although the argument can be turned around, so that while it is unreasonable to expect a private individual to keep receipts in order to establish the defence, it is much more reasonable to expect this of a large body such as a public authority.¹¹⁷ It was this problem which gave rise to the second approach, developed by the Irish Supreme Court in Murphy v AG,¹¹⁸ where Henchy J held that