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

The Supreme Court considered whether the Limitation Act 1980, section 32(1)(c), postpones the limitation period for claims to recover money paid under a mistake of law, and if so when such a mistake is "discoverable". The court held that the decision in Deutsche Morgan Grenfell [2007] 1 AC 558 (which had treated discoverability as tied to an authoritative final decision) was wrong so far as it concerned the test of discoverability, and that the limitation clock should not be held to begin running only upon final judicial determination. The court nonetheless upheld the principle in Kleinwort Benson [1999] 2 AC 349 that restitutionary claims lie for payments made under a mistake of law, but construed section 32(1)(c) so that time runs from the date at which the claimant knew or could with reasonable diligence have known (to a standard sufficient to justify beginning the preliminaries to litigation) that he had made the relevant mistake.

• The court rejected pleas that HMRC were barred by res judicata, issue estoppel or abuse of process from advancing the present challenge, and permitted HMRC to withdraw earlier concessions and amend pleadings.
• The Court remitted the factual issue of when the test claimants could with reasonable diligence have discovered their mistakes to the High Court for determination and permitted parties to amend pleadings accordingly.

Background and parties: The Franked Investment Income (FII) Group Litigation concerned claims by UK-resident parent companies seeking repayment of tax (including surplus advance corporation tax and corporation tax under Case V) paid in the period from the 1970s onwards. The claimants advanced restitutionary claims based on payments made under a mistake of law or unlawful demands (Woolwich alternative), and Francovich damages claims in the alternative.

Procedural history: The litigation was managed under a Group Litigation Order. Multiple references to the Court of Justice of the European Union were made. Earlier key English decisions included Kleinwort Benson (recognition of restitution for mistake of law) and Deutsche Morgan Grenfell (House of Lords decision on discoverability). The present appeals came from decisions of the Court of Appeal ([2010] EWCA Civ 103 and [2016] EWCA Civ 1180) and concerned Issue 28 (when claimants discovered or could with reasonable diligence have discovered their mistakes) together with preliminary pleas that HMRC was estopped or otherwise barred from mounting the challenge.

Nature of the claim and relief sought: Claimants sought repayment of tax paid purportedly under a mistake of law (and, alternatively, repayment under Woolwich and Francovich damages). Central to the parties positions was section 32(1)(c) of the Limitation Act 1980, which postpones limitation for an "action for relief from the consequences of a mistake" until the mistake is discovered or could with reasonable diligence have been discovered.

Issues framed: (i) Whether the Revenue were precluded by res judicata, estoppel or abuse of process from challenging the scope or operation of section 32(1)(c) in these proceedings; (ii) whether Kleinwort Benson was correctly decided so that a restitutionary action lies for mistakes of law; (iii) whether the decision in Deutsche Morgan Grenfell on discoverability (linking it to final authoritative decisions) was correct; and (iv) if Deutsche Morgan Grenfell was wrong, the correct test and its application to the FII test claimants.

Reasoning and conclusions: The court held that (A) HMRC were not barred by res judicata, issue estoppel or abuse of process from advancing their challenge and could withdraw earlier admissions, although the court acknowledged the prejudice to the claimants and reserved costs remedies; (B) Kleinwort Bensons recognition of restitution for mistakes of law stands: section 32(1)(c) is apt to cover claims where mistake is an essential element of the cause of action; (C) Deutsche Morgan Grenfell was wrong in treating discoverability as necessarily postponed until an authoritative final decision established the mistake; tying discoverability to final judicial determination defeats the purpose of limitation statutes and creates illogical results (time running only after proceedings have concluded); (D) the correct approach is objective: discoverability is when the claimant knew or could with reasonable diligence have known that he had made the mistake, meaning a state of knowledge sufficient to justify taking steps to investigate and pursue a claim (for example, instructing lawyers, collecting evidence); and (E) the question whether the BAT (test) claimants discovered, or could with reasonable diligence have discovered, their mistakes must be remitted to the High Court for factual determination after amendment of pleadings.

Result: The appeal was allowed in part: Deutsche Morgan Grenfell was departed from so far as it concerned discoverability under section 32(1)(c); Kleinwort Benson was retained as authority that mistakes of law can give rise to restitutionary claims; and Issue 28 was remitted to the High Court for factual determination.

Appeal allowed in part. The Supreme Court permitted HMRC to withdraw earlier concessions and to raise the challenge. It held that Deutsche Morgan Grenfell was wrongly decided in treating discoverability as meaning only when a final authoritative decision establishes the mistake; instead section 32(1)(c) postpones limitation until the claimant knew or could with reasonable diligence have known (to a standard sufficient to justify commencing investigation or proceedings) that he had made the mistake. Kleinwort Benson was affirmed insofar as a restitutionary cause of action for a mistake of law exists. The court remitted the factual question of when the test claimants could with reasonable diligence have discovered their mistakes to the High Court and allowed amendment of pleadings.

Appeal to the Supreme Court from the Court of Appeal decisions in Test Claimants in the FII Group Litigation v Revenue and Customs Comrs [2010] EWCA Civ 103 and Test Claimants in the FII Group Litigation v Revenue and Customs Comrs [2016] EWCA Civ 1180. Earlier proceedings included High Court judgments (Henderson J: [2009] EWHC 2893 (Ch); [2014] EWHC 4302 (Ch)), references to the Court of Justice in the FII litigation, and prior appellate consideration in this court (Test Claimants in the FII Group Litigation v Revenue and Customs Comrs (No 3) (Case C-35/11) and this courts FII (SC) 1 [2012] UKSC 19).