B.F.S. (DUNDEE) LIMITED v. DAVID MURPHIE [1999] ScotSC 1 (20th January, 1999)

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allows parties, before answer, a proof of their respective averments, under reservation of the first plea-in-law for the defender; appoints the cause to the procedure roll of

9^th. February, 1999 to enable a suitable diet to be assigned; allows parties to be heard on any question pertaining to the expenses of the cause on said date.

This case came before me for debate on 26th. August, 1998, and, once again, I find myself having to apologise to parties for the time it has taken to produce this judgment, but it is a further indication of the pressure of business upon this court and the limited time available for consideration of a set of circumstances and arguments therenent which are by no means straightforward, irrespective of the financial issues involved.

The debate proceeded upon the defender's plea-in-law 1, a general plea to the relevancy and specification of the pursuers' pleadings. Mr. Foulis' basic proposition was that I should sustain the plea and dismiss the action. As a secondary position, he moved me to exclude Art. 3 of condescendence from probation.

In this action, the pursuers, a limited company, seek decree against the defender, the company's former finance director, an individual resident within this court's jurisdiction, for payment of the sum of Ј3,648 plus interest at 8% from citation. It is averred by the pursuers that the defender was employed as their finance director until 31st. May, 1994. The pursuers resolved to make him an ex gratia payment on his departure. The pursuers aver that the defender initiated discussion on this topic via the company auditors. A representative of the auditors appears to have been a party to the discussions and to have tendered advice on the tax implications of such a payment, which advice is said to have been to the effect that a payment of Ј14,592 to the defender would not attract income tax if it were to be regarded as payment of compensation for loss of office. The pursuers aver that they then resolved to make such a payment and that this is recorded in a minute of a directors' meeting of 17th. May, 1994. The minute records that the payment is to be effected by paying Ј8,000 cash and transferring ownership to the defender of his company car at its then book value of Ј6,592. It is then averred:-

" Said agreement was reached and said minute was prepared on the understanding by all directors that payment of Ј14,592 was not liable to income tax, was the limit of the pursuers' liability either to the defender or to the Inland Revenue and could be paid to the defender on a gross basis without deduction of income tax."

I presume that when the pleader referred to "all directors" he intended to include the defender. The pursuers go on to aver making the payment, but that when the Inland Revenue became aware of the payment, they adjudged it to be an ex gratia payment which attracted a Schedule E liability of Ј3,648 which the pursuers have been obliged to pay. Against that background, the pursuers claim that the defender has been "enriched" to the tune of Ј3,648 and that they are entitled to repetition of that sum.

Further, in Art. 3, the pursuers aver that the defender obtained advice from the insurance broker who was responsible for the pursuers' directors' pensions scheme, of which he was a member, about the options open to him at his projected retirement date, and that, in the event, he elected to take the maximum tax free lump sum available to him on retirement and to purchase an annuity with the balance. The effect of this, so the pursuers aver, is that any ex gratia payment made by them to the defender on retirement would inevitably attract income tax. It is further averred that the defender knew that that was the position and did not so inform his fellow directors nor the company's auditors. It is averred:-

" Had he elected not to take a lump sum from the pension scheme, the payment from the pursuers might have been classed as a relevant benefit from an approved scheme and, as such, avoided liability to income tax."

" The sum sued for having been paid by the pursuers to the defender under mistake of fact or law, the pursuers are entitled to repetition of said sum according to the condictio indebiti."

Despite that sole plea-in-law, the pursuers appear to aver two bases upon which recovery of money is sought from the defender, namely (1) that, notwithstanding the terms of the minute of the directors' meeting of 17th. May, 1994, the agreement bewteen the parties was to pay him Ј14,592 subject to tax, the parties being under the mistaken apprehension that no tax was due, and that he should be required to reimburse them the sum as income tax which they were ultimately required to pay to the Inland Revenue and/or (2) that the defender had some unspecified obligation presumably arising out of his directorship to tell the pursuers that the effect of his pensions' election would be that no payment to him of any ex gratia nature could be made tax exempt, that position having been made known to him by the pursuers' insurance brokers. That is the background against which the defender's agent made submissions in support of his preliminary plea.

Under reference to "The Law of Restitution in Scotland" by the late W.J. Stewart, esp. Chapter 7 pages 122 and 135-6, including the supplement to the text, Mr. Foulis noted that it was not averred that there was mistaken belief as to what was agreed between the parties. The agreement, duly minuted, was that the pursuers would pay the defender Ј14,592. They had done so. Where was the error ? There was no reference in the minute to the incidence of taxation. The pursuers could not therefore aver that something occurred in respect of which either of the parties was under a mistaken belief.

At page 122, para 7.11. 1, Mr Stewart states the following proposition, viz., "There will be a claim to recover money or goods paid or transferred in such a way that the recipient becomes the owner, if the transfer was in the mistaken belief that the payment or transfer was legally obligatory." He goes on to explain that "legally obligatory" generally means bound by a legal obligation. He seems to suggest at para. 7.14 that before there can be "mistaken belief" an essential ingredient is that the error be excusable. The issue of "excusable error" was considered in the subsequent five judge Inner House decision in Morgan Guaranty Trust Co of New York v Lothian Regional Council 1995 SLT 299 (i.e. the decision is subsequent to the publication of Mr. Stewart's text) and with the abolition therein of the "error of law rule," as I shall come to consider, the significance of the "excusable error" issue has reduced if not vanished given that an error of law is an error of law and trying to determine whether a party should have been aware of the law as part of the process of resolving claims for unjust enrichment now is no longer a relevant consideration. The case of Morgan further decides that it makes no difference to the application of the condictio indebiti whether the mistaken belief is one of fact or law and that formulation of the law seems to me to detract from any significance formerly attached to the subjective qualitative assessment of the pursuer's mistake.

Mr. Foulis went on to refer me to the judgment in Balfour Melville v Duncan 1903 5F 1079. Frankly, I found the facts of the case difficult to comprehend. Suffice it to say that it appeared to relate to overpayments made to a liferentrix by trustees. At page 1085, Lord Kinnear says:-

" I think the averments irrelevant, because I cannot find in the case as stated any legal basis to support the conclusion of the summons. To say that the pursuer paid an amount in full for certain specified years, whereas he might have made deductions from each year's payment which he did not in fact make, is by no means enough to found a condictio indebiti. To recover overpayments under such an action, it is necessary that the pursuer should show that they were made in error or ignorance, and in such circumstances as will entitled him to be relieved against his own mistake. But if all that he can allege is that he paid a debt in full, when he might have insisted, if he had thought first, upon making a certain deduction, and if it appears on his own shewing that he did so in full knowledge of his legal rights and of the facts bearing upon his liability, I can see no ground in law on which he should be entitled to recover. The pursuer says nothing as to the reasons which induced him to pay more than he alleges he was bound to pay; and, in the absence of all information on that head, it is impossible for the court to affirm that he paid on grounds and under circumstances which entitled him to repetition."

While the importance of a pursuer showing circumstances in which he would be entitled to relief are undoubtedly affected by the decision in the Morgan Guaranty case, it does seem to me that the rest of Lord Kinnear's opinion remains sound on when an order for repetition can be made. While in the present case, Mr. Foulis concentrated on his submission that, standing the terms of the minute of the directors'meeting of 17th. May, 1994, there was no scope for maintaining there could be any mistaken belief, it might have been more fruitful if he had developed what seems to underly Lord Kinnear's foregoing comments that not only must the mistaken belief be averred but that there is, in fact, a mistake must be averred. I am quite clear from the pleadings that the mistaken belief in the present case was that the severance payment could be paid to the defender without deduction of income tax. What does not seem to me to be averred is why that was a mistake. It is averred that advice was sought and given about setting up the payment in such a way that it ought not to attract income tax but nothing is averred to explain that arrangement's failure. All that is said is that the Inland Revenue adjudged the payment to be an ex gratia payment subject to income tax. On that basis, the pursuers appear to have paid up without further argument. It seems to me, especially in the light of the extract from Lord Kinnear's opinion, that the defender should have notice why the advice from the auditors was wrong, if it was wrong, for if the pursuers paid the Inland Revenue without any legal obligation to do so, then I do not see on what possible basis they could seek to recover from the defender. If one considers the backgrounds in two of the cases to which I was referred, Morgan Guaranty, to which I have already made reference and Glasgow Corporation v Lord Advocate 1959 S.C. 203, then it will be seen that in each of these cases the starting point for actions based upon the condictio indebiti was a decision of a court that corrected a misunderstanding of a legal obligation, in the Morgan case, it being decided that a so-called "interest swap deal" was ultra vires a local authority and so the contract was void ab initio and thus payments made in implement of supposed obligations thereanent were recoverable, and in the Glasgow Corporation case, the issue whether a local authority printing department had a liability to purchase tax was resolved in favour of the local authority who then sought repayment of tax historically paid, that claim at that time being defeated by the "error of law" rule, the decision in that case being the high point, if that is the correct way to describe it, of that rule in Scots law. For these reasons, had the pursuers' case solely been that payment was made to the defender in the mistaken belief that income tax did not require to be deducted from the payment, then I would have sustained the defender's first plea-in-law in the absence of any relevant averment of the actual mistake.

However, that is not all that the pursuers aver. I have already related at the outset of this Note the relevant averments from Article 3 of condescendence wherein the pursuers claim that the reason why the defender's severance payment could not be tax free was because he had already elected to take the maximum tax free lump sum payment he could from his occupational pension scheme. No effort was made by either agent at the debate to demonstrate the correctness of that proposition as a matter of revenue law, so I must take these averments pro veritate. The pursuers aver that the defender was aware of the tax implications of his election on any further severance payment but failed to disclose his knowledge to his fellow directors as they at that time remained. The words "bad faith" are not used in the averments, but there is more than a hint of that sort in a situation where a director takes advantage of information from the company's pension scheme advisers about his own position and then fails to bring that information to the attention of his fellow directors leaving them labouring under a misapprehension as to the taxation of his severance payment. There is a strong hint in these pleadings that the remaining directors of the company were in a state of factual error about factors, at least one in particular relating to the pension scheme election, which would affect the tax treatment of the so-called compensation for loss of office. Mr. Foulis' position in argument was that I should, if not sustaining his plea-in-law on relevancy to effect the dismissal of the action, at least exclude Article 3 from probation. Contrariwise, I have come to be of the conclusion that the only proper case which could fall under the general umbrella of "unjust ennrichment" and which is relevantly averred on record, beacuse there is at least some basis in the averments from which an explanation for the mistake could be gleaned, is that averred in Article 3.

Mr. Milne for the pursuers in his response to Mr. Foulis' attack on the relevancy of his pleadings directed me to the 9th. Edition of "The Law of Scotland" by Gloag and Henderson, esp. at p159, where the learned authors of that edition made the point that restitution, recompense and negotiorum gestio were all examples of quasi-contracts which differed from contracts in respect that the obligations under them arise by force of law and not from the consent of the party obliged. They are described as being cases "where obligations analogous to those of promisor are imposed, for reasons of equity or convenience, on a party who has not made any promise." He appeared to be oblivious to the publication of the 10th. Edition of Gloag & Henderson and to the entirely different approach to this whole chapter of law therein adopted, under the heading "Unjust Enrichment," nor to the fact that this reorganisation of the chapter has been undertaken by the present Lord President. At page 470 of the 10th. Edition, under the paragraph heading, "The Concept" the learned author now states what in my humble opinion is the following extremely useful general proposition:-

" A person may be said to be unjustifiably enriched at another's expense when he has become owner of another's money or property or has used that property or otherwise benefited from his actings or expenditure in circumstances which the law regards as actionably unjust, and so requiring the enrichment to be reversed. The obligation does not depend upon agreement but is obediential, arising by operation of law. Although the underlying principles are the same, in the various spheres, as a general rule Scots law treats cases involving recovery of money under the heading of repetition, and those involving the recovery of moveable property fall under the heading of restitution, while cases in which the defender has benefited unjustifiably from expenditure or actings of the pursuer or from the use of his property are dealt with under the heading of recompense." I pause to observe that, arguably, the facts averred in Art. 3 as to how the defender allegedly came to be unjustifiably enriched could fall under the categorisations of either repetition or recompense.

Mr. Milne went on to direct me to the following authorities and other sources of the law, viz.;

3. Morgan Guaranty Trust Co of New York v Lothian Regional Council 1995 S.L.T.

It was Mr. Milne's general submission which he said was derived from these authorities that, "certain obligations arise by force of law which can compel a party who has enjoyed an individual benefit to account for the benefit unexpectedly received." No one would argue with that, but is somewhat unhelpfully broad. However, he submitted that on the facts in the present case, namely that the defender was the pursuers' finance director and that he had approached the company's auditors about an ex gratia payment on retiral; the auditors had agreed and discussion followed; consideration was given to whether such a payment would attract taxation; advice was received that the payment should be treated as compensation for loss of office which would render it exempt; agreement was concluded and the minute of the directors' meeting recorded that agreement, but it was on the understanding of both parties to the agreement that no tax would be payable in respect of the payment and that was the "premise" on which the payment was made. In support of that he did refer me to the defender's admissions at Ans 2 on page 7 of the Record to the effect that the defender was advised that the payment could be made without any tax liability being attracted and that he would have asked for more had he thought tax was going to be deducted. That demonstrated, he averred, that both sides were under a mistaken belief about the tax implications of the payment. I think there is a difficulty about this argument, namely that it does not appear to demonstrate that the defender has been unjustifiably enriched. They apparently intended that he would receive Ј14,592 and he did so. On the other hand, all parties appear to be agreed that there has been a misunderstanding which has resulted in the pursuers having to make an unexpected and unintended payment. He maintained that there was sufficient averred to allow a proof before answer to determine "what error, if any, there was affecting the parties' understanding of the obligation undertaken by the pursuers and its implementation having regard to tax considerations." That might be so if there were error averred, but, until one considers the specific averments in Art. 3, no basis for the error is averred.

Mr. Milne then turned to Art. 3. and reminded me of its factual content as already rehearsed. I have already indicated that, if the pursuers establish these averments, then in my opinion they will establish that the defender was acting in bad faith and they acted under an error of fact as to the true tax implications, The defender's answers to these issues in Ans. 3 seem to me to be less than satisfactory and, arguably, lacking in frankness but, again, no argument was addressed to me in the course of the debate about the correctness of the alleged interrelationship between the tax free lump sum from the pension scheme and the severance payment, for tax purposes, so it would be difficult to resist the conclusion that the pursuers were under an error of fact in relation to the tax implications of that payment and that the defender had been unjustifiably enriched to the extent by which the pursuers had to meet the final demand from the Inland Revenue.

Mr. Milne, however, argued that the whole circumstances demonstrated an error in the interpretation of a public general statute. If that is his position, it is not reflected in his pleadings which make no reference to any statute nor to how it may have been misinterpreted.

He went on to describe the defender as having received what amounted to a "windfall" as a consequence of the error and that this was a classic case of error as to liability to make a payment. I should accordingly repel the defender's preliminary plea and allow a proof simpliciter.

2. There was nothing in the pursuers' pleadings that put in issue the proposition that

Ј14,592 was other than the payment the pursuers were obliged to make given their

3. Any misunderstanding of the tax position does not affect the basic agreement.

contract; there had to be an error in the implementation of the contract, not an

error inducing the contract; if there was an error here, it preceded entry into the

contract; it was not part of the agreement that if there was a liability to pay income

tax, that the defender would meet that liability; in any event, it was not averred that

All they can aver, said Mr. Foulis, is what was done. I should accordingly sustain his preliminary plea and dismiss the action.

The level of attention given by both parties to the landmark decision in theMorgan Guarnanty case was disappointing. At least Mr. Milne directed me to the case. Mr. Foulis said its ratio made no difference to the outcome of this case where there was no error at all. They would also both have benefited from more careful consideration of the well researched and entertaining text on the subject of unjust enrichment written by David Sellar, Advocate, for the Stair Memorial Encyclopaedia - in particular, his fascinating argument in support of the doctrine of recompense. I quite accept that there is no argument in this case that, esto there is any error, it is an error of law and so repetition would be inept, that being the argument imported into our law from England which was thoroughly disposed of by their Lordships in Morgan Guaranty but there is a great deal more in the judgments of that case than merely the disposal of that issue a consideration of which in relation to the facts of this case would have benefited. Lord President Hope at p.309D, for example, appeared to be in favour of a general category of actions on the ground of unjust enrichment and appeared to have no great enthusiasm for slavish taxonomy beyond that generalisation, saying at page 309L, " But the important point is that these actions are all means to the same end, which is to redress an unjustified enrichment upon the broad principle nemo debet locupletari aliena jactura. Thus the action of repetition, to take this as an example, may be based upon the conditio causa data causa non secuta, the condictio sine causa or the condictio indebiti depending upon which of these grounds of action fits the circumstances which give rise to the claim. The nature of the benefit received by the defender and the circumstances on which the pursuer relies for his claim ought, in a properly organised structure of this branch of the law, to provide all that is needed for the selection of the appropriate remedy."

Further, at page 316B, he says, " In my opinion, the essentials of the condictio indebiti are that the sum which the pursuer paid was not due and that he made the payment in error. It is the fact that the sum was not due that provides the ground for repetition on the principle of unjustified enrichment. An averment that the payment was made though in error is needed in order to show this is not a case of donation."

" In recompense the emphasis is upon the enrichment, the loss and the absence of intention of donation. In repetition the emphasis is upon the payment of money in the mistaken belief that it was due. But the two formulations are closely related to each other and may be treated as falling under the single descriptive heading of unjust enrichment. The grand rule here is that found in the familiar brocard nemo debet locupletari aliena jactura. Thus Baron Hume in his lectures (Stair ed. Vol. III, p.172) groups both restitution, as he defines it, and the condictio indebiti as illustrations of the maxim. The two examples have this in common, that the basic principle on which the rule rests is one of equity and application of the remedy in any individual case must be determined by equitable considerations."

Further, at 318F he said, " The term repetition may apply where a payment of money has been made by one party to another in the mistaken belief that it was due in the performance of a legal obligation and the payer seeks to recover what he paid in error. Where the circumstances disclose that by the actings of one party performed without any intention of donation another party has benefited, and the equitable remedy falls to be quantified in terms of a payment to him measured by the extent of the benefit gained by the other, the wider term of recompense becomes convenient. But in an area of law where fine analysis or distinction bewteen forms of action may well be dangerous and the overriding consideration is one of equity, these labels should be recognised simply for what they are."

The analysis of the payment made by the pursuers to the defender on the basis of the case averred principally in Art. 3, namely that he, being a director of the company, took advice from the company's pensions advisers in contemplation of his retirement about the choices open to him in relation to the pension scheme i.e. to what extent the fund available to provide him with a pension should be taken by way of lump sum at retirement subject to the Inland Revenue's rules on such payments and that armed with that advice and having determined to take the maximum tax free lump sum payment and, it is averred by the pursuers, knowing that he could not get any other payment from the pursuers on retirement on a tax exempt basis, he sought a payment of compensation for loss of office and agreement was reached to pay him Ј14,592 on the understanding, so the pursuers aver, that that would be the total liability of the company and that such a payment could legitimately be made to him tax free, the analysis of the subsequent payment to the Inland Revenue having to be made does not seem to me as Mr. Foulis suggests to be regarded as an error inducing the contract, especially given that the contract is, in reality, the contract of epmplyment between the parties, which is being varied with a view to bringing it to an end, but rather as an unexpected consequence on account of an error in fact on the part of the pursuers about the effect of the defender's occupational pension election upon a situation where otherwise everyone is said to have understood the payment could be tax free and therefore an error in the implementation of the contract resulting in the unjustified enrichment of the defender which unjustified enrichment should be repaid. The circumstances seem to me to lend themselves either to a claim for repetition or recompense. In either event, but only on the special case, if I may so describe it, as averred in Art. 3, which is dependent on the alleged inter-relationship for revenue purposes of the tax free lump sum from the pension and any other payment on retirement beyond normal salary, I consider that there requires to be an investigation of the facts before the issue can be finally determined. Not without considerable hesitation, but on the basis that there is an underlying strong argument that the defender appears to have been unjustifiably enriched, I shall allow parties a prooof before answer. I shall appoint the cause to the roll of 9^th. February, 1999

to enable a proof before answer to be assigned and to deal with any issue pertaining to

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	Scottish Sheriff Court Decisions
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Scottish Sheriff Court Decisions

B.F.S. (DUNDEE) LIMITED v. DAVID MURPHIE [1999] ScotSC 1 (20th January, 1999)