UK: Time And Time Again – Court Considers Limitation Issues Once More

Last Updated: 14 December 2009
Article by Gaby Kaiser and Kate Ayres

The court has grappled once again with the difficulties of determining the date when economic damage is suffered by a claimant in a professional liability claim. Notwithstanding the well-known House of Lords decision in The Law Society v Sephton (2006), which sought to provide some clarity as to the approach to be taken, the courts continue to experience difficulties determining the date on which a cause of action accrues, leading to considerable uncertainty and expense for professionals and their insurers who are then forced to litigate the issues.

At the end of last month, the Court of Appeal handed down its judgment in Axa Insurance Ltd v Akther & Darby Solicitors (2009). That decision highlighted the continuing problems the courts encounter and, amongst other matters, suggested that the Supreme Court may wish to revisit some elements of Sephton, a decision which appeared to be the high-water mark for claimants.

Background

In tort, the primary limitation period is six years from the date damage has been suffered (s.2 of the Limitation Act 1980). The following points can be gleaned from the case law as to the question of when damage has been suffered:

  • In Forster v Outred (1982) it was held that actual damage can be defined as "any detriment, liability or loss capable of assessment in money terms and it includes liability which may arise on a contingency ...". In that case, a solicitor advised a mother in relation to a mortgage on her farm in order to secure her son's loan, and it was held that she suffered actual damage at the time of the execution of the mortgage deed because, at that time, she entered into a burdensome contract which encumbered her freehold with a charge thus diminishing its value to her.
  • In Nykredit v Edward Erdman (1997), the court held that, where a claimant acquires some benefit as a result of a transaction, damage may only be suffered as and when the burden of the transaction exceeds the overall benefits.
  • In Sephton, 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. The Lords found that actual damage was held only to have been suffered when a defrauded client first presented the Society with a valid claim. A risk of potential third party claims was a "pure contingent liability" generally insufficient to constitute actual damage.

Subsequent cases have highlighted the difficulties in applying the principles derived from these cases and demonstrate that the question of whether a claim falls within the Sephton principle, i.e. it is a pure contingency, is increasingly fact specific. For example, in Shore v Sedgwick (2008) the Court of Appeal held that loss was suffered by the claimant immediately when he transferred his accrued benefits from an occupational pension scheme to a more risky personal pension income withdrawal scheme, and not when he subsequently suffered losses due to a fall in annuity rates; this was not a "pure contingent liability" case.

Facts of Akther

This case revolved around the conduct of panel solicitors' firms in a scheme under which an insurer (of which the claimant was the assignee) provided after the event (ATE) expenses insurance. The insurer alleged that the solicitors had (1) breached their duties to vet and only take on claims into the scheme which had a greater than 50 per cent chance of success and a likelihood of damages of over £1,000; (2) thereafter committed conduct breaches of their duties to notify the insurer where the claims fell below the relevant criteria and failed in their duty to conduct the claims with due care and diligence. Whether the claims of negligence against the solicitors were time-barred was considered as a preliminary issue by the Commercial Court, on the basis of assumed facts, which found in the solicitors' favour. The claimant appealed.

It was therefore necessary for the Court of Appeal to apply the principles identified in the previous case law and determine when it was that damage had been suffered. The Court, by a majority, found in favour of the solicitors; it concluded that the limitation period started to run from the date on which the contract of insurance was entered into. Lord Justice Lloyd dissented.

The judgments

Lady Justice Arden considered Sephton in some detail and, in particular, the decision that a diminution in value of a particular asset or assets was distinguished from the diminution in the value of a party's total net worth with the consequence that a claimant who diminishes the value of their general assets only, for example by executing an unsecured guarantee, incurs only a contingent liability, which is not damage for limitation purposes. By contrast, a guarantor who executes security over his property would at that point diminish the value of a particular asset, and would suffer damage for limitation purposes, setting the limitation period running (perhaps before they even realise damage has been suffered).

Arden LJ's view was that Sephton required there to be a measurable loss before time began to run, that is to say loss which is additional to the incurring of a purely contingent liability. Accordingly, in Akther, the insurer suffered loss when the policies were entered into because at that point the liabilities under the policies were greater than they should have been. The risk and the premium were intertwined and, in economic terms, the premiums were worth less than they should have been because the liabilities were greater than they should have been.

Similarly, Arden LJ held that damage in respect of the conduct breaches occurred when the breaches took place in so far as the insurer was thereby exposed to greater liabilities than it would have otherwise been. Longmore LJ agreed that the insurer was worse off at the time of the inception of the policies, as any valuation of the policies at that time would have to take into account the assumed fact that there had been no proper vetting.

However, whilst Lord Justice Lloyd accepted that from a commercial and economic point of view the insurer suffered actual loss at the time that it entered into a disadvantageous policy, he held that the effect on the commercial and economic position did not provide the answer as to whether in the eyes of the law the insurer suffered damage at that point. His view was that this led only to a contingent liability and that until a claim actually arose under the policy the liability remained contingent. Accordingly, Lloyd LJ held that this case was not distinguishable from Sephton, and the claims were not statute barred. He applied the same reasoning to the conduct breach claims.

Implications

The Court of Appeal decision appears to provide further scope for asserting that damage has accrued, for limitation purposes, at an earlier date save in respect of "pure" contingency cases. In particular, there is likely to be a clear benefit to professional indemnity insurers, and their insureds, if they are able to assert that limitation will start to run at an earlier date, even though the damage may not become apparent until some (possibly very lengthy) period after. There will, however, remain a factual issue as to whether or not the particular circumstances give rise to pure contingency. It should also be remembered that in such a case the additional three year limitation period from the date of the claimant's knowledge of the relevant facts may then apply (section 14A of the Limitation Act 1980).

In any event, the decision, and the fact that three judges were not unanimous, serves to highlight how difficult, and unpredictable, the law is on this issue. Although Sephton appeared to provide considerable assistance for claimants, it is noteworthy that Arden LJ posited that that the rule for contingent liabilities may have been created to seek to avoid there being cases like in Forster, where the wrongdoer benefits. Moreover, these difficulties perhaps explain why Arden LJ went so far as to suggest that the Supreme Court may wish to revisit its decision in certain respects. Permission to appeal to the Supreme Court was granted and so the Supreme Court may indeed get the chance to review and clarify, so watch this space!

In the meantime, in light of the current thorny legal issues involved, the best advice remains to attempt to resolve the position at an early stage. In certain cases, a summary judgment application may be appropriate, however, as limitation issues are increasingly fact specific, trial of a preliminary issue in relation to limitation may be more appropriate. It goes without saying that great care should continue to be taken to identify at an early stage whether there is a potential limitation issue so that costly battles can be avoided altogether.

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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