UK: As Time Goes By - Limitation Decision In Solicitors´ Negligence Case

Last Updated: 17 March 2008
Article by Fergal Cathie and Simon Schooling

The Court of Appeal decision in Watkins v Jones Maidment Wilson was handed down on 4 March 2008. The House of Lords in Law Society v Sephton (2006) raised the prospect of claimants having wide scope to litigate stale claims, and Watkins enters the difficult territory of how those principles are to be applied in practice.

Section 2 of the Limitation Act 1980 provides that "an action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued". A claim in negligence only accrues when "actual damage" is suffered, but the question of what constitutes actual damage has proved problematic, particularly when loss is contingent on future events.

Nykredit

Nykredit, in 1997, approved the formulation in the 1982 case of Forster v Outred that actual damage was "any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency,particularly a contingency over which the plaintiff has no control". In Forster, the Court of Appeal had held that the plaintiff suffered "actual damage" at the moment when she charged her home as security for her son’s business borrowings, and not later when her son’s creditors called upon the security. That was so even though the creditors may never have called on their security if, for example, the son’s business had proved successful.

Despite this approach, and despite reciting the desirability of the claim accruing at or soon after the negligent act, Nykredit left the door open for claimants to revive old claims in some circumstances. The claimants in Nykredit were lenders whose security was valued negligently, and who would not have lent but for the negligent survey. The court contemplated circumstances in which claimants in that position may not be financially worse off immediately on entering the transaction, but may become so later. The borrower may not default, and even if he does, the overvalued security may be sufficient. In such cases at the outset "financial loss is possible, but not certain. Indeed it may not even be likely". The date when any loss was first suffered would depend on the facts of each case and although it was said there could be "evidential and practical difficulties" in determining that date, those were "not difficulties in principle".

Sephton

Further encouragement to claimants seeking to challenge limitation defences came in Sephton. Accountancy firm Sephton prepared accounts for a sole practitioner solicitor for submission to the Law Society but, from 1988, failed to spot that the solicitor was misappropriating client funds. A client’s complaint in April 1996 led to the Law Society’s investigator discovering on 17 May 1996 a huge deficit in the solicitor’s client account. The Society compensated former clients from October 1996, but proceedings were not issued against Sephton until 16 May 2002.

Sephton contended that the Society first suffered damage when the solicitor made a payment after the first negligent report. However, the court held that at that stage there was no more than a risk of future claims against the Society, and that this "purely contingent loss" was insufficient to constitute actual damage. Instead, time only began to run when the Society received a valid claim by a defrauded client, and so the claim was not barred by limitation.

Watkins

The claimants in Watkins attempted to excuse their delay by reference to Sephton and Nykredit. Dr and Mrs Watkins had contracted with builders to buy land with a completed house, the defendant solicitors advising them on the contract. The contract stated that if the house was not completed by a certain date the Watkins could opt to take the uncompleted building and pay a reduced sum, determined by a surveyor. Before they reached the date when the house should have been completed, the Watkins agreed (on advice) to waive the right to take the uncompleted building. Later, they regretted that because a long and costly dispute with the builders ensued and they sued their solicitors. They issued proceedings more than six years after they had entered into the contract and agreed the change.

The Watkins’ first argument, following Nykredit, was that they were not financially worse off merely by entering into the agreement, even though they would not have done so if they had been properly advised. Instead, at the outset there was some financial advantage to them in having entered the contract, and it was only later that events occurred rendering the transaction, on balance, disadvantageous. That argument was dismissed by the Court partly on the basis that, properly advised, the Watkins would have negotiated, and therefore they suffered a measurable loss of chance on signing the contract without having attempted to negotiate a better deal. It was also said the correct analysis was that merely entering into the contract on negligent advice had caused them loss.

The Watkins’ second line of argument, relying on Sephton, was that on agreeing to waive the right to take the uncompleted building, they exposed themselves to only the possibility of a dispute with the builders, and their claim in tort for negligent advice only accrued when the dispute arose. The Court dismissed that argument on the footing that the right to take the uncompleted building was a valuable right, and the Watkins accordingly suffered loss when it was surrendered. This was so even though it was correct that surrendering the right also gave rise to a contingent liability for loss which would only be suffered in the event of a dispute.

Implications

The limitation defences in Watkins were established at the trial of preliminary issues. In November 2007, the High Court in Shore v Sedgwick (which concerned a claim brought against an independent financial adviser) dismissed the claimant’s limitation arguments only at the conclusion of a full trial. These cases illustrate an unfortunate trend towards limitation being a question of fact turning on witness evidence, and whilst that means an application for summary judgment on limitation grounds may often be inappropriate, a preliminary issue trial on limitation issues can be a viable alternative.

Solicitors acting for claimants, and those who insure them, should be alive to the potential for misunderstandings in this area of the law, and ensure that proper risk management procedures are in place to prevent costly errors being made by inadvertent delay in issuing proceedings on behalf of clients.

Moreover, attempts by claimants to take advantage of Nykredit and Sephton in order to pursue stale claims will often fail, and there is every reason for defendants to take a robust stance in the right circumstances. Those leading cases do refer to relatively unusual scenarios where the accrual of a negligence claim can be delayed, potentially by very long periods. However, professionals facing claims, and those insuring them, will welcome the result in Watkins as giving further scope to defeat stale claims

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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