Test Claimants in the Franked Investment Income Group Litigation and others v Commissioners for Her Majesty’s Revenue and Customs

An action to recover money paid under a mistake of law falls within section 32(1)(c) of the Limitation Act 1980 where the mistake is an essential element of the cause of action. Time begins when the claimant knows, or could with reasonable diligence know, that a mistake was made with sufficient confidence to justify investigating and advancing a worthwhile claim. It does not await a final judicial determination.

The inquiry is objective. Reasonable diligence assumes adequate but finite resources and reasonable urgency. The claimant bears the burden of showing that discovery would have required exceptional measures. A concession on limitation does not create cause of action estoppel, although withdrawal of a concession remains subject to the court’s control against unfairness and abuse.

The test claimants sought restitution of corporation tax paid under a mistaken understanding that domestic tax provisions were enforceable consistently with EU law. Their claims formed part of the long-running FII Group Litigation.

Henderson J held in [2014] EWHC 4302 (Ch) that the mistake was discoverable when the Court of Justice decided the Hoechst litigation in March 2001. The Court of Appeal allowed the claimants’ appeal in [2016] EWCA Civ 1180, holding that discovery occurred only when the relevant EU-law question was finally determined in December 2006.

The Revenue appealed on Issue 28. It challenged the limitation reasoning in Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs and, more broadly, the application of section 32(1)(c) of the Limitation Act 1980 to mistakes of law. The claimants contended that estoppel, abuse of process and the Revenue’s earlier concession barred the challenge. The central substantive issue was when a mistake of law is, or could with reasonable diligence be, discovered.

1. Disposition. The appeal on Issue 28 was allowed unanimously and the issue remitted to the High Court. The parties were to be permitted to amend their pleadings, and the High Court was to determine on evidence when the relevant mistake could with reasonable diligence have been discovered.

2. Procedural objections. Lord Reed and Lord Hodge, with whom Lord Lloyd-Jones and Lord Hamblen agreed, held that cause of action estoppel did not apply. The Revenue’s earlier concessions concerned a limitation defence and did not determine the existence of the restitutionary cause of action. Issue P had not previously been determined, so issue estoppel did not arise. Raising the challenge was not an abuse of process when assessed by the required broad, merits-based judgment. The evolving law, the case management of the group litigation and the fact that only the Supreme Court could reconsider the House of Lords authorities were decisive considerations.

   The court also permitted the Revenue to withdraw its concession and amend its pleading. The potential prejudice was serious but could partly be addressed through costs. The public importance of resolving the limitation question, including its effect on other high-value claims, outweighed the claimants’ asserted procedural disadvantage.

3. Mistakes of law. By a majority of four to three, the court adhered to Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349. Section 32(1)(c) of the Limitation Act 1980 applies where a mistake of law is an essential ingredient of an action for relief from its consequences. That construction gives the statutory language its ordinary meaning and prevents time running before a claimant could reasonably know the circumstances giving rise to the claim.

4. Discoverability. The majority departed from the limitation ruling in Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs [2007] 1 AC 558. Discovery does not require an authoritative final judgment establishing the truth of the claimant’s case. A mistake is discoverable when the claimant knows, or could with reasonable diligence know, of it with sufficient confidence to begin the preliminaries to proceedings, or recognises that a worthwhile claim arises.

   Reasonable diligence is objective. It asks how a person carrying on the relevant kind of business would act with adequate but finite resources and a reasonable, rather than excessive, sense of urgency. The claimant must prove that the mistake could not have been discovered without exceptional measures which could not reasonably have been expected.

5. Dissent. Lord Briggs and Lord Sales, with whom Lord Carnwath agreed, would have overruled Kleinwort Benson Ltd v Lincoln City Council on limitation and confined section 32(1)(c) to mistakes of fact. They considered that extending it to mistakes of law undermined legal certainty and could reopen very old transactions. On the majority’s construction, however, they agreed that the final-judgment approach in Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs should be displaced.

1. United Kingdom Supreme Court, [2020] UKSC 47 : Allowed the Revenue’s appeal on Issue 28 and remitted the discoverability question to the High Court.
2. Court of Appeal, [2016] EWCA Civ 1180 : Allowed the test claimants’ appeal and held that the relevant mistake was discoverable on 12 December 2006, when the pertinent EU-law issue was authoritatively determined.
3. High Court, [2014] EWHC 4302 (Ch) : Held that the mistake was discoverable on 8 March 2001, when judgment was given in the Hoechst litigation.
4. United Kingdom Supreme Court, [2012] UKSC 19 : At an earlier stage, held that section 32(1)(c) applied only where mistake was an essential element of the cause of action. The case proceeded on the assumption that the relevant House of Lords authorities were correct.
5. Court of Appeal, [2010] EWCA Civ 103 : Determined earlier issues concerning statutory attempts to disapply section 32(1)(c) in tax cases.
6. High Court, [2008] EWHC 2893 (Ch) : Held that the disputed tax had been paid under a mistake, but did not decide when the limitation period began.