UK: Today’s House of Lords decision on Limitation

Last Updated: 7 March 2006
Article by Joe Bryant and Peter Mansfield

Today’s decision by the House of Lords in Haward -v- Fawcetts (the first time the Lords have considered the application of section 14A of the Limitation Act) is a welcome and much needed boost to professional defendants and their insurers seeking to rely on limitation defences.

Nearly two years ago the Court of Appeal’s decision in Haward -v- Fawcetts threatened to widen significantly the scope of the three-year extension to the limitation period provided by section 14A of the Limitation Act. The Court of Appeal’s decision posed potentially serious consequences for professionals and their insurers, effectively rendering the three year limitation period impotent as a defence to stale claims and leaving the 15 year "longstop" period as the only useful limitation threshold.

The House of Lords’ reversal of the Court of Appeal’s decision has reinstated and usefully clarified the application of limitation rules in cases where loss or the potential cause of loss is initially hidden to the claimant. Perhaps more importantly, the decision provides a long overdue reminder that, despite the lower courts’ recent (and growing) reluctance to allow technical limitation arguments to defeat claims, limitation exists to strike a balance between a claimant’s right to bring a claim and a defendant’s right not to have stale claims brought against it. Claimants should once again be aware that to delay investigation into and issuing of a claim will result in a real danger of them losing what might otherwise be a legitimate cause of action.

The application of section 14A of the Limitation Act 1980 and, in particular the question of the knowledge a claimant must have before the three year limitation period starts running, has been considered by the courts in countless previous decisions, most of which were reviewed by the Court of Appeal in this case. However, never before has the House of Lords considered the application of section 14A: until today. In a unanimous decision, the House of Lords in Haward -v- Fawcetts has overturned the decision of the Court of Appeal and brought some much needed clarification both to the practical application of limitation under section 14A and the principles that underlie the concept of limitation as a whole.

Haward -v- Fawcetts: the claim

The claimants bought a company in December 1994. They did so, allegedly, on the advice of their accountants, the defendants. The claimants also invested additional money into the company over the next several years. Again, it was alleged that the investments were made in reliance on the defendants’ advice (or lack of contrary advice). The claimants’ investments failed to result in the anticipated improvement in the company’s fortunes and virtually all of the money poured into the company was lost. In December 2001, the claimants issued a claim against the defendants.

The claimants argued that, had they received proper advice, they would either (a) never have bought the company at all or (b) have cut their losses a lot earlier than they actually did (in 2000). The claimants knew that, in relation to the allegations that pre-dated December 1995, the six-year primary limitation period had expired. However, they relied on the three-year period provided by section 14A of the Limitation Act 1980 to argue that they were still 'in time' to bring the claim, asserting that they first acquired the knowledge necessary for time to start running less than three years before issuing their proceedings.

Having issued the claim in December 2001, the key date was December 1998 – three years before. By this date, the claimants knew that they had invested in the company on the advice of the defendants. They also knew, by this date, that the investments had become losses. However, the claimants were not advised that they might have a claim against the defendants until around May 1999. The question that has now exercised the minds of three courts and nine judges was whether, before December 1998, the claimants knew enough for time to have started running under section 14A – in which case the time limit expired before proceedings were issued in December 2001. Or whether the claimants only knew enough for time to start running after December 1998, in which case they issued proceedings in time.

Limitation: the Law

A negligence claim will normally be time-barred six years after a claimant suffers loss. But, if a claimant remains unaware that it has suffered loss (or, that loss it has suffered might have been caused by another’s fault) section 14A of the Limitation Act 1980 (introduced by the Latent Damage Act 1986) will provide it with a further three years to bring a claim. This three-year period starts from the date a claimant first acquires knowledge:

  • of the material facts about the loss suffered and the identity of the defendant (neither of which were in issue in this case); and
  • most importantly in this case, that the loss was "attributable in whole or in part" to the act or omission that is alleged to constitute negligence, albeit that section 14A expressly provides that knowledge that the act or omission was negligent is not relevant for the purposes of triggering the three year period.

So the issue relevant in this claim concerned the precise extent of the knowledge required of a claimant before the three-year time limit began to run; and in particular the extent to which a claimant has to know that his loss was "attributable" to the defendant’s actions or inactions.

Haward -v- Fawcetts: the decisions in the lower courts

In a preliminary hearing, the High Court struck out those parts of the claim for loss pre-dating December 1995. The Court ruled that the claimants could not rely on the primary limitation period because these losses had occurred more than six years before the issue of the claim. Furthermore, the claimants could not rely on section 14A because they had known well before December 1998 (i.e. three years before they issued their proceedings) that their initial and subsequent investments in the company had become irretrievable losses and that they had relied on the defendants’ advice (or lack of contrary advice) in making the investments. The Court accepted that the Claimants may not have known that the Defendants’ advice on which they relied had been negligent until much later. However, this was irrelevant for the purposes of section 14A, as mentioned above.

The Court of Appeal, however, took a different approach and unanimously reversed the High Court's decision. In carrying out a detailed review of the existing case law, the Court of Appeal concluded that it was now well settled law that, for time to start running under section 14A:

  • "knowledge" means "know with sufficient confidence to justify embarking on the preliminaries to the issue of a writ, such as submitting a claim to the proposed defendant, taking legal and other advice and collecting evidence"; and
  • "attributable … to" means "capable of being attributed to".

The Court then went on to find that knowledge (in the sense explained above) that loss was capable of being attributed to the defendant’s acts (or omissions) was not enough. It was necessary, the Court held, for a claimant to have knowledge of the act or omission that is "causally relevant" for the purposes of an allegation of negligence. Applying this test to the facts of the case before it, the Court considered that there were a number of possible causes for the claimants’ loss apart from the defendants’ advice (or lack of it) (these included the fact that an employee of the company was suspected of fraud and the fact that the agricultural market, which the company was involved in, was in a poor state because of the BSE crisis). Because of the Claimants’ uncertainty about the cause of loss, the Court concluded that the Claimants "did not know [more than three years before issuing proceedings] that all or part of the damage was capable of being attributed to [the Defendants]".

The consequences of the Court of Appeal’s decision was, effectively, that time would not start running against a claimant even though he had discovered loss and even though he knew, or suspected, that some other’s actions might have caused his loss. If the claimant remained ignorant of precisely what or who had caused his loss, he could merrily sit and wait without fear of the limitation period even starting to run.

Haward -v- Fawcetts: the House of Lords’ decision

The House of Lords decision (also unanimous) reverted back to the decision of the trial judge (albeit for different reasons), again striking out the elements of the claim for loss pre-dating December 1995. Amongst the five full judgements the following key principles can be identified:

  • Limitation is a statutory defence that seeks to strike a balance between a claimant’s right to have sufficient opportunity to bring a legal claim and a defendant’s right not to have stale claims brought against it;
  • The Limitation Act is Parliament’s attempt to strike a balance between these two irreconcilable interests and it is the judiciary’s job to try to identify the balance that the legislation has endeavoured to strike. It is not the function of judges to try to strike their own balance;
  • The knowledge required by the claimant for time to start running under section 14A is not certain knowledge but rather is knowledge of sufficient confidence to justify embarking on the preliminaries to the issue of a writ, such as submitting a claim to the proposed defendant, taking advice and collecting evidence. In other words, the claimant must know enough for it to be reasonable to begin to investigate further;
  • What is required of the claimant is knowledge of the factual essence of the act or omission to which the injury is attributable, not the precise, particularised details of alleged negligence for which a claim is eventually brought.
  • With regard to the requirement that the claimant must know that his loss is "attributable" to the defendant’s acts or omissions, time does not begin to run until the claimant knows there is a real possibility his damage was caused by the act or omission in question;
  • However, it is not necessary that the claimant identifies conclusively that the defendant’s acts or omissions were the cause of his loss – it is sufficient that he knew enough for it to be reasonable to embark on preliminary investigations into this possibility, investigations that section 14A gives him three years to complete;
  • Further, the fact that there may have been possible additional causes of the claimant’s loss is not relevant if one possible cause was, to the claimant’s knowledge, the defendant’s act or omission;
  • The date on which the claimant first considered the possibility of pursuing a claim (or first knew he might have a claim) is not the point at which time starts to run. It starts to run rather sooner, when the claimant first realises he has, on the face of it, cause to complain of unsound advice or knew enough to justify setting about investigating the possibility that the advice received was defective.

The House effectively concluded that the Claimants in Haward -v- Fawcetts knew enough to make it reasonable for them to have begun to investigate whether or not they had a claim against the defendants more than three years before the claim was issued. Accordingly, in finding for the defendants (for whom CMS Cameron McKenna acted), the Lords ruled the claimants could not rely on section 14A and a significant portion of their claim was time barred.

Haward -v- Fawcetts: the Implications

The Court of Appeal’s take on when time under section 14A should start to run reflected English courts’ current reluctance to allow, what are considered to be, purely technical defences to defeat claims. Its decision stopped only marginally short of saying that time under section 14A would only begin to run once a claimant knew that the loss he suffered was caused by a negligent act or omission of a specific individual or individuals. Lord Scott, in the House of Lords, pointed out that, were the Court of Appeal’s decision to stand, it would expose those who gave advice on financial matters to potential liability not simply until the expiry of three years after the loss-making consequences of the advice are known but until the expiry of three years after all the reasons why that advice was negligent are known. To allow this would have substantially altered the balance between claimant and defendant that Parliament has struck.

It was, perhaps, surprising that the Court of Appeal did not step back from its (very detailed) analysis of the case law and consider first the principles behind, and the need for, limitation as a concept. Although seen as a "technical" defence, limitation exists for a reason and section 14A was introduced to address a specific problem. Limitation as a principle exists not only to protect a claimant’s right to seek redress for wrongs done to him but also to protect a defendant from the threat of stale claims, which are difficult to defend as memories fade and documents are lost or destroyed. This balancing act is not easy and complete fairness may not be possible in all cases; but, recognising that claims should become time barred eventually, one has to accept that a balance does need to be struck. Section 14A’s introduction resulted from an unfairness in this balancing act. Claimants who had suffered loss but were completely unaware of it had their claims time-barred before they had any reasonable prospect of identifying they might be able to bring one (such as where there were undetected defects in a building as happened in Pirelli General Cable Works Ltd -v- Oscar Faber & Partners). So, the Latent Damage Act extended a second chance to a claimant, allowing him three years from the date on which he discovered he had suffered loss in which to bring his claim.

Crucially, however, the Act specifically counter-balanced this benefit to the claimant by providing that, for time to start running, it was not necessary for the claimant to know, as a matter of law, that negligence was involved. In trying to be fair and balance the scales between the claimant and defendant, it was considered sufficient that the claimant had three years in which to investigate the acts or omissions of the defendant to which his loss was suspected to be attributable. If the claim is not brought within the three-year period then the claimant forfeits his right to bring a claim at all because it would be unfair to the defendant to be prejudiced by the claimant’s procrastination.

The House of Lords, as they saw it, sought to redress this balance – resulting in the huge swing from one extreme (3 – 0 in the Court of Appeal) to the other (0 – 5 in the House of Lords). One of the more straightforward dicta from the Lords’ judgements (and thus one of the most useful in trying to establish clear practical guidance on when section 14A limitation starts to run) comes from Lord Brown, who concluded that it is sufficient, for time to start running that a claimant:

"…knows enough … to realize that there is a real possibility of his damage having been caused by some flaw or inadequacy in his advisers’ … advice, and enough therefore to start an investigation into that possibility, which section 14A then gives him three years to complete."

The line of decisions in Haward -v- Fawcetts has remarkable similarities to the decisions in Brocklesby -v- Armitage & Guest and Cave -v- Robinson Jarvis & Rolf from several years ago. Although dealing with a different aspect of limitation law, the Court of Appeal in Brocklesby also stretched reasonable interpretation of the Limitation Act to allow a claimant to proceed with his claim. It took the House of Lords in Cave -v- Robinson to overrule the decision in Broklesby and re-assert a purposive interpretation of the Act that restored the necessary balance between claimants’ and defendants’ interests.

Once again, it has taken the House of Lords to remind us that, no matter how much it might offend the Court of Appeal’s sense of justice, limitation exists for a reason and it should apply to prevent claimants from bringing claims if they fail to do so expeditiously. Indeed, although the House of Lords’ decision (just as its decision in Cave -v- Robinson did) simply restates the law as most of us understood it to operate before the Court of Appeal intervened, it remains important because it serves as a reminder that the highest court in the land recognises the value of limitation as a concept. Professionals and their insurers will hope that, in the future, the lower courts will once again recognise the importance of balancing the competing rights of claimants and defendants where limitation is in issue, instead of simply tilting the balance too far in favour of dilatory claimants.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 02/03/2006.

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