UK: Time Waits For No Man

Last Updated: 28 August 2008
Article by Fergal Cathie and Chris Dunlop

The recent Court of Appeal decision in Shore v Sedgwick Financial Services Ltd (2008), which concerned a claim against an Independent Financial Adviser (IFA) for negligent advice in relation to a pension scheme, provides evidence of the problems facing the courts in applying the principles of limitation law, which in recent years have become increasingly uncertain and fact sensitive.

In Shore, one of the issues for the Court was at what point had the claimant suffered "damage" (thereby giving rise to the cause of action) for the purpose of determining when the limitation period applicable to tortious claims starts to run. This has proved to be a thorny issue for the courts, particularly in circumstances where losses are contingent on future events.

The following points emerge from previous case law:

  • Actual damage can be defined as "any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency ...". Therefore, in circumstances where a solicitor advised a mother in relation to a mortgage on her farm in order to secure her son's loan, she suffered actual damage at the time of the execution of the mortgage deed, as at that time she had entered into a burdensome contract which encumbered her freehold with a charge, thus diminishing its value to her (Forster v Outred (1982)).

  • In circumstances where a claimant acquires some benefit as a result of a transaction, damage may only be suffered if and when the burden of the transaction exceeds the overall benefits (Nykredit Plc v Edward Erdman (1997)).

  • A risk of potential third party claims was a "pure contingent loss" and is generally insufficient to constitute actual damage. Thus, in circumstances where the Law Society was required to compensate clients affected by the negligence of a reporting accountant in failing to spot that a solicitor was misappropriating client funds during his examination of the firm's accounts, actual damage was held only to have been suffered when a defrauded client first presented the Society with a valid clai Law Society v Sephton (2006)). Sephton arguably represents the high point for claimants seeking to challenge a limitation defence.

As can be seen, there is a distinction between Sephton and Forster, the latter dealing with measurable loss at an earlier time, which is different from a potential future contingent loss which may never occur.

The difficulties faced by the courts in applying this distinction were recently demonstrated in Watkins v Jones Maidment Wilson (2008), a negligence claim in which the Watkins had contracted with builders to buy land with a completed house, the defendant solicitors advising them on the contract. It 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. Before the completion date, the Watkins agreed (on advice) to waive the right to take the uncompleted building. A dispute with the builders ensued and they sued their solicitors more than six years after they had entered into the contract and agreed the change.

The court disagreed with the Watkins' argument that, following Nykredit, they were not financially worse off merely by entering into the agreement. The court concluded 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. The court also disagreed with the Watkins that, following Sephton, on agreeing to waive the right to take the uncompleted building, they exposed themselves only to the possibility of a dispute with the builders, and their claim only accrued when the dispute arose. 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 surrendering the right also gave rise to a contingent liability for loss which would only be suffered if a dispute arose.

Court of Appeal decision in Shore

Mr Shore was a member of his employer's occupational pension scheme, a relatively safe final salary scheme. He sought the advice of an IFA, Sedgwick, following which, in 1997, he transferred his accrued benefits to a more risky personal pension income withdrawal scheme. By 2002, Mr Shore was unhappy with the performance of the fund, which had suffered in value as a result of falling annuity rates, and in 2005 he issued proceedings against Sedgwick.

The trial judge found that Shore had not suffered loss immediately on entering the personal pension fund, as he had only exposed himself to the risk of future loss, but that he had suffered loss two years later when, as a result of a fall in annuity rates, his rights under the new scheme became demonstrably less valuable. However, that date (two years post change) was more than six years prior to the issue of proceedings, and the claim was therefore statute-barred.

Dismissing Shore's appeal, and rejecting the argument that this was a "pure contingent liability" case, the Court of Appeal went further than the trial judge by concluding that the loss was immediate upon Shore's transfer into the personal pension fund. The Court held that Mr Shore was interested in a secure rather than a risky pension scheme. Thus, from Mr Shore's perspective, the new scheme was less advantageous to him. The fact that the risk to which he was exposed might not eventuate did not mean that he did not actually suffer loss as a result of being exposed to that risk. The Court considered that: "it is the possibility of actual financial harm that constitutes the loss. That possibility is present even if there is also the possibility that the claimant will be financially better off as a result of being exposed to the risk". In reaching this conclusion, the Court noted that Shore had sought to quantify his damages on the basis of a comparison of income by reference to the transfer date, which was at odds with his primary contention that damage had not been suffered as at that date.

In the light of Shore, it is important to be alive to the possibility that claimants might seek to get round limitation defences by suggesting that damage was not suffered at a particular date, only to quantify their claims by reference to that same (earlier) date.

The Court of Appeal also agreed with the trial judge that Mr Shore had sufficient knowledge for the purposes of section 14A of the Limitation Act more than three years before proceedings were started, in line with the principles set out by the House of Lords in Haward v Fawcetts (2006).

The future

The House of Lords' decision in Sephton prompted fears that claimants would have more ammunition to find ways around limitation defences. On one analysis, therefore, Shore can only be good for defendants.

However, Shore does demonstrate how the courts find difficulty with the distinction between Forster and Sephton, and determining on which side of the line a claim falls is unlikely to be easy, particularly in complex cases where expert evidence is likely to be required. Additionally, Lord Justice Dyson expressed the view in Shore that Nykredit was not authority for a special approach to the question of when loss is suffered in negligent advice cases. All cases would be dependent on their own particular facts. So, Shore emphasises the trend towards such arguments becoming increasingly fact dependent (in Shore itself, the Court took into account evidence of Mr Shore's wish for a secure investment). Although an application for summary judgment on limitation grounds may be inappropriate in those circumstances, a trial on limitation issues at a preliminary stage might be a viable alternative.

Additionally, solicitors acting for claimants and those who insure them, should be alive to the potential for misunderstanding 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.

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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