UK: To The Limit One More Time

Last Updated: 24 March 2010
Article by Neil Jamieson and Simon Schooling

The Court of Appeal's decision in Pegasus v Ernst & Young (March 2010) has once again favoured the defendants' argument that the claim against it was time-barred. Good news for professionals and their insurers, who may also find it a useful confirmation of the law of limitation, particularly in the context of reduced economic activity prompting businesses to try to claim losses in relation to advice dating back more than six years.

Legal setting

The six year primary limitation period in tort runs from the date that actual (as opposed to potential or prospective) loss or damage is first suffered. Since professionals usually owe duties in both contract and tort, and primary limitation in contract expires six years after the date of breach, primary limitation in tort could expire much later than in contract if the loss is first suffered long after the date of breach.

In Forster v Outred (1982), actual damage was defined as "any detriment, liability or loss capable of assessment in money terms and it includes liability which may arise on a contingency, particularly a contingency over which the plaintiff has no control". That formulation was approved by the House of Lords in Nykredit (1997) and again by them in Law Society v Sephton (2006). However, Nykredit suggested that, nonetheless, in the particular circumstances of negligent advice to lenders resulting in property being acquired as security for a loan, financial loss might initially be "possible but not certain" and that may not amount to actual damage. The well known case of Law Society v Sephton concerned an entirely different factual scenario of a claim against accountants for failing to spot fraud when submitting reports on a law firm to the Law Society, exposing the Law Society to a risk of claims from defrauded clients. In that case, the Lords decided that the claim was in time despite it being issued a decade or so after the relevant breaches, on the basis that at the breach dates there were only pure contingent liabilities rather than any actual damage. Actual damage was only suffered when a defrauded client first presented the Society with a valid claim. However, some features of that case were not typical: for example, the professional firm owed no duties in contract to the claimant.

It is striking that none of the claimants seeking to take advantage of a perceived relaxing of the rules by Sephton in relation to professional liability claims has been successful in doing so. In Watkins v Jones Maidment Wilson (March 2008), Shore v Sedgwick (July 2008), Pickthall v Hill Dickinson (October 2008), Axa v Akther & Darby (November 2009), and now Pegasus v Ernst & Young, the claimants all found that their references to Sephton (and sometimes Nykredit as well) did not prevent their claims being time-barred. However, in each of these judgments the courts have considered the facts of the case in detail to establish why the claim was too late.

The claim in Pegasus

In 1997, an entrepreneur, Mr Bradbury, sold his business and sought advice from Ernst & Young ("E&Y") on achieving relief from capital gains tax by reinvesting the sale proceeds. In 1998, he subscribed for shares in a newly incorporated company, Pegasus. From 2000, Pegasus purchased various businesses in a way that ensured reinvestment relief for Mr Bradbury. However, it was later alleged that, without jeopardising Mr Bradbury's reinvestment relief, Pegasus' own tax position on ultimate disposal of the businesses could have been improved if by April 1998 Pegasus was, or held an intention to become, a parent company with subsidiaries.

Pegasus, and Mr Bradbury as shareholder, issued a claim in 2005 (more than six years after the relevant date). Part of the claim alleged that E&Y negligently failed to advise regarding subsidiaries in or before April 1998. E&Y denied that their advice was negligent.

Judgment in Pegasus

The Court directed a preliminary issue trial on limitation on the main part of the claim and, in the alternative, E&Y also applied for summary judgment on Pegasus' claim that duties were owed to Pegasus in 1998.

The High Court granted summary judgment to E&Y on the relevant head of claim by Pegasus, and this was upheld on appeal, meaning that the Court of Appeal had only to consider Mr Bradbury's limitation position. The Court of Appeal also upheld the High Court's ruling that Mr Bradbury's claim was time-barred.

Mr Bradbury claimed that, as at April 1998, the possibility of Pegasus having to pay additional tax on the disposal of businesses which Pegasus was still to acquire (or even identify) was merely the risk of future loss of the type contemplated in Sephton, rather than actual loss sufficient to complete the cause of action in tort and start the six year limitation period running.

However, the Court of Appeal rejected these submissions, stating that where a professional has been instructed to achieve one outcome and negligently has achieved a different result, actual damage is or may be suffered by the fact that the professional's client has not received what he ought to have received. The courts have a "willingness" to infer that such failure in itself amounts to actual damage. In those circumstances, to complete the tort, it is not necessary in addition that the claimant is able to show he is immediately financially worse off.

In Mr Bradbury's case, even if he could show that after proper advice to him Pegasus would have been set up with subsidiaries, such a claim would be time-barred because he would not have received in 1998 the result he should have received, and that would have amounted to actual damage. This was so even though in 1998 there was "no certainty" that Pegasus would ever pay more tax than it would have done if subsidiaries had been put in place.

Implications

It is understood that another Court of Appeal case on similar issues, Axa v Akther, has settled and will not now be pursued to the Supreme Court.

The Court of Appeal has refused permission to Mr Bradbury to appeal to the Supreme Court. In looking back over the authorities since Sephton, the Court of Appeal judgment in Pegasus consolidates and solidifies the interpretation over the past few years of Sephton principles. Whilst there will no doubt be further factual scenarios where purely contingent loss is suffered as in Sephton, effectively extending the period during which a claim can be commenced, it is now clear that in the context of claims against professionals such circumstances will be relatively rare. In particular, and contrary to most claims against professionals, Sephton was not a case where a professional was instructed by the claimant to achieve a particular result.

In determining which side of the line cases may fall, the courts seem inclined to try to understand the commercial reality underlying the facts of the case, and use that as a guide to whether loss has been suffered. In Pegasus, the Court reasoned that, if his claim could be proved, by 1998 Mr Bradbury was in a "materially worse commercial position". In Axa, the court perceived the claimant as being in "a seriously worse commercial position than it ought to have been" following the solicitors' alleged negligence and, therefore, was "troubled" by the claimant's argument that, notwithstanding the commercial reality, no actual loss was suffered in law at that point.

These comments emphasise that limitation issues can often require an evaluation of underlying facts. However, Pegasus and other reported cases show that, even in cases whose facts are highly complex, a relatively short preliminary issue trial on limitation can be enough to dispose of a claim and bring substantial savings in costs.

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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