Limitation Periods: Claims After a Mistake in Law
How long does a business or individual have to bring a legal claim after a mistake in law has led to them suffering a loss, such as tax payments? A key takeaway from an important ruling is that if you could have known, with reasonable diligence, that a mistake was made – the limitation period has begun.
What’s the background?
The test claimants1 claimed that UK tax laws at the relevant time were contrary to what is now Article 63 TFEU on free movement of capital. The case concerned the payment of corporation tax by UK resident parent companies on dividends received from foreign subsidiaries; and advance corporation tax by the ultimate parent on dividends to shareholders.
It was a complex tax case culminating in HMRC’s appeal to the Supreme Court following a number of decisions of the higher courts. But one particularly notable issue is that of section 21(1)(c) Limitation Act 1980 and its application to mistake of law. In this case, the limitation period for a restitution claim is six years from when the cause of action accrued, but the some of the tax payments involved date back to the UK’s accession to the EU in 1973.
The claimants relied on s32(1) under which the limitation period may start at the time a plaintiff discovers the mistake “or could with reasonable diligence have discovered it”.
The Supreme Court ruled in favour of the test claimants, upholding a 1999 decision of the Court of Appeal that s32(1)(c) applied to mistakes of law as well as to mistakes of fact. It also ruled that “reasonably discoverable” meant as soon as the claimant realised that a “worthwhile claim” has arisen.
Among the principles highlighted in its conclusion, the court made clear that the limitation period for bringing a claim applies whether or not the action is well-founded. That period is not postponed until the claimant has discovered his rights, but is postponed until they have discovered (or could have done with reasonable diligence) that they had a cause of action. On this point, the case was remitted to the High Court so that the issues of discoverability of the mistake and determining the date of commencement of the limitation period could be ruled upon.
Further, where a defendant disputes an element of the cause of action, that does not mean that the commencement of the limitation period is postponed until that dispute has been resolved.
What does this mean?
The Court recognised that “colossal amounts of money” were at stake in the proceedings and, for that reason, it was worthwhile for every arguable point to be taken. This emphasises just how important the outcome is and why businesses and their advisers should note the implications.
The case itself concerned tax paid by virtue of a mistake in law, but the ruling is not limited to tax disputes and extends to other types of claim for relief in respect of the consequences of a mistake in law.
The SC justices provide invaluable practical application of the principles, pointing out that cases will be fact specific and that the burden of proof is on the claimant. As for the standard of reasonable diligence expected, this is how someone in business of the relevant kind would act, on the assumption that “he desired to know whether or not he had made a mistake, if he had adequate but not unlimited staff and resources and was motivated by a reasonable but not excessive sense of urgency”.
The importance of businesses having legal and other professionals on board to advise them will be key to the question of whether a potential claimant “could” - with reasonable diligence - had known or discovered the mistake.
1Test Claimants in the Franked Investment Income Group Litigation & Ors v Commissioners of Inland Revenue (1) and Test Claimants in the Franked Investment Income Group Litigation & Ors v Commissioners of Inland Revenue (2) [2020] UKSC 47
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