18 January 2018

Heads Up, LADS!

MJM Limited


MJM Limited
In a recent Supreme Court decision the Chief Justice has made an important ruling with potentially wide implications.
Bermuda Corporate/Commercial Law
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In a recent Supreme Court decision the Chief Justice has made an important ruling with potentially wide implications. The case concerns the time limit for bringing a claim in negligence against a party with whom the claimant is also in a contractual relationship. The decision is of particular interest to Lawyers, Accountants, Architects, Doctors, and Surveyors (the "LADS") but also anyone else who makes their living by providing professional advice to clients.

The effect of the decision is that a claim can be brought against one of the LADS (or other professional) in negligence independently from any claim for (negligent) breach of contract. The time limit for bringing a claim in contract and negligence is six years, but the date on which the time starts running for each type of claim may differ significantly.

The Limitation Act 1984 provides a time bar defence against stale claims. The time limit for bringing a claim in contract and tort is six years from the date that the relevant cause of action arose. The time limit can be extended in special circumstances, none of which arise for discussion here.

Accrual of a cause of action

A cause of action "accrues" when all the necessary elements of the claim have occurred. For a breach of contract, this is normally the date on which the contract is breached. For negligence, this is when both a breach of duty of care has occurred, and a measurable and foreseeable loss has been sustained as a result of that breach. (It is relevant to note that this does not apply to claims in torts where no proof of loss is required, like defamation, trespass and nuisance.)

In English law it was generally held that when a client relies on a lawyer's faulty advice, the loss occurs at the date of the reliance on the advice. Bermuda law has to date followed that line of thinking.

However, in recent years, the English position on the date for the accrual of a cause of action in negligence has evolved. There have been a number of cases in the last 20 years in which the English court has held that where the negligence gives rise to a contingent loss (ie where the consequence may not necessarily give rise to a financial loss) the limitation period does not start to run until the actual financial consequences are sustained. This may be many more than 6 years after the actual reliance on the bad advice. For example, in a case where the security for a loan has been negligently drawn, and the security is ineffective, the court has been prepared to accept that the loss does not occur until reliance is placed on the enforcement of the security, and the creditor client (eg a bank) recovers less than he (or it) would have received had the security been valid.

This means that even though there would be no claim for a breach of contract after 6 years from the date that the client relied on the faulty advice, there may still be an independent claim in negligence long after the six years has elapsed when the claimant actually suffers foreseeable financial loss as a result of the negligence. This could be when the security turns out to be defective and unenforceable, and instead of exclusively recovering the value attributable to an asset which was subject to the faulty security instrument, the secured creditor has to share that value pro rata with all the other unsecured creditors. The time limit for bringing the action would be 6 years from the date of the recovery, not 6 years from the date of the reliance on the negligent advice.

The contract "rule"

In the 1980's, in a case arising from Hong Kong, the Privy Council expressed the opinion that where parties have entered into a contract the parties' mutual obligations in tort cannot be any greater than those to be found expressly or by necessary implication in their contract, including any limitations of action. This statement was not strictly part of the decision, and so is an obiter dictum, and not binding on other courts.

However, the Bermuda Court of Appeal in White v Conyers Dill & Pearman [1994] LR Bda 9 applied the dictum of the Privy Council as an integral part of its own decision in a subsequent case in which a former client asserted a claim for both breach of contract and negligence against his lawyers. The Court of Appeal upheld the first instance judge's decision and struck out the claim on the basis that a) more than 6 years had elapsed from the date the (allegedly) faulty security document in that case had been drawn up b) the fact that there was a contract meant that there could be no independent claim in tort and c) that even if there was an independent claim, the relevant date was the date of reliance on the advice and the execution of the faulty document, and so the six years had run from that date.

This became the conventional view, and has been applied several times in cases over the years since it was decided in 1994. This analysis has featured in countless opinions on Bermuda law since then which have been provided by eminent Bermuda lawyers to foreign courts. The general approach has been that where there has been negligent advice under a professional services contract (usually against one of the LADS), the time for bringing the claim is 6 years from the date on which the advice is given, or the document reflecting the advice is executed, or the negligent omission occurs.

It is also relevant to note that Bermuda has yet to pass a legislative amendment to extend the limitation period where "latent" damage was in fact sustained as a result of a negligent act or omission, but could not have been discovered until after the limitation period has run (eg in a defective building design).

A new way?

Recently, in Medeiros v Island Construction Ltd and Others [2016] SC Bda 103 Civil the Chief Justice has held that the "rule" in the Court of Appeal's decision has been misunderstood and misapplied. He held that a claimant has the ability to choose whether to sue for breach of contract or negligence and that he may use the type of claim which is most advantageous to him, especially if it preserves a claim in tort would otherwise be barred. He applied an English decision from the House of Lords (now Supreme Court) decided both after the Privy Council decision and a year or so the Bermuda Court of Appeal's decision. That case decided that a claimant may make a claim in contract or in tort, whichever one is the more advantageous, and may take the benefit of any difference in the extension of the time limit for bringing the claim. The Chief Justice agreed, and said that he was not bound by any "rule", and that the Bermuda Court of Appeal's decision was in any event not binding on him.

Therefore when a former client sues one of the LADS for negligent advice, the present position seems to be that the claim will not be excluded by the contractual six year "rule", but the former client may wait until actual loss is suffered before the cause of action accrues, and may measure the time limitation period for bringing a claim as six years from the date the loss is suffered, not just the date of the contractual breach, or the reliance on the advice.

What does it mean?

This has some significant potential implications. For example, where a lawyer has drawn a defective deed of conveyance or mortgage, the client who discovers that the deed was negligently drawn may wait until he or she has suffered loss flowing as a result of the negligence. This may only arise when the client attempts to sell the property and suffers loss because the deed has been improperly drawn and the conveyance cannot be completed or there are consequential losses which flow as a result; or, in the case of a lender, the mortgagee may wait until such time as there is a default on the payment of the mortgage, enforcement proceedings are taken to obtain possession and sell the property and when the defect in the deed becomes apparent, then the mortgagee suffers actual loss. In the case of property transactions, this could take many years to emerge.

Other examples might be when an architect has designed a building negligently, and the financial consequences of remediation work are not felt until years later, after the 6 year period for breach of contract has run; or, perhaps when reliance on an audit report trigger financial consequences which are not incurred until after the 6 year period has run for breach of contract; or, perhaps negligence in the performance of surgery, or medical treatment, the effects of which do not give rise to loss until much, much later, or faulty survey resulting in a defect in title, which only emerges when the owner tries to sell the property.

Is the Chief Justice right?

Well, Yes and No. (It is a legal question, after all.)

The "Noes" might say that he has misapplied the doctrine of precedent and has ignored the Court of Appeal's decision, which is binding on him, even if it was based on an obiter dictum of the Privy Council. He has also declined to follow several decisions of co-ordinate jurisdiction at the first instance level, which he is supposed to do, unless there was a distinguishing feature of the case, which there does not appear to be, and he did not suggest that there was. But these are lawyers' points.

The "Ayes" would say that the decision is correct in law because it brings Bermuda law into line with the prevailing English law precedent, and removes an anomalous distinction between English law and Bermuda law, the gist of which appeared only to favour the LADS, not the people whose interests they were supposed to serve. Right or wrong on the doctrine of precedent, it would seem likely that the Privy Council would (on any appeal from this decision) apply the modern English rule anyway.

Does it matter?

Yes, not just to the LADS, but their respective professional indemnity insurers. It is important to be able to draw a line under potential claims after a measurable period, especially when witnesses' memories and physical evidence may deteriorate over time, and the ability to produce a witness may be difficult or impossible, if they have (for example) left Bermuda.

The policy reason for having a time limitation rule to bar claims being brought after a certain period is to achieve certainty and finality. The English case law, which will be applied in Bermuda, has now developed in such a way that it is not always easy (or sometimes even possible) to say when a loss has occurred, and therefore whether the time period has begun to run. This is unsatisfactory for both potential claimants and potential defendants.

As things stand, at one end of the spectrum, the court might hold that cause of action accrued when some notional, theoretical but unquantifiable damage has occurred on the execution of a defective mortgage, as in the early English cases; this means that time starts to run from that date. Or, at the other end of the spectrum, applying more recent English case law, the loss might be held to have occurred only when enforcement of the same mortgage reveals a defect, perhaps after many years of satisfactory payments, when a real financial loss has been sustained. In that case, the time period for bringing the same negligence action would not start to run until then.

This will likely lead to arbitrary results, based on the court's assessment of the fact pattern of a particular case, and this will undermine confidence in the fairness and consistency of application of the legal principle. Until there is a decisive case which settles the approach, or until statute intervenes, there is likely to be considerable uncertainty, and legal advice on the point will have to be qualified.

What to do?

Where there is a contractual relationship, it is possible to modify the extent of liability under it, and to provide for specific limits to apply as to quantum of liability or the time within which a claim may be brought for breach of duty, in contract or in tort or both. Most professional services contracts are in writing or evidenced by terms in writing.

Therefore, it would be sensible in many cases to make a simple addition to the contract for provision of professional services by one of the LADS, (or others in a similar relationship) to state that any claim for breach of contract or loss arising from any negligence must be brought within 6 years of the date on which the relevant advice is given or breach of duty occurred. This will be adequate to bring clarity and certainty to the date when time starts to run, irrespective of when the loss is sustained.

Such a term would not be unreasonable, in light of the nature of the relationship, the fees charged for the services, and the risks borne by the professionals, who are generally required to be insured. It may be a negotiation point for some clients, but really (I would suggest) most reasonable people do not expect to be able to sue their former adviser more than 6 years after the advice is given, or the professional services are rendered. In most cases, the reliance on professional advice, or services, is immediate, so the 6 year limit will normally apply; it is only in circumstances of a contingent or potential financial loss that an express contractual limitation will make a difference.

The Supply of Services (Implied Terms) Act 2003 is not engaged because it does not reduce the scope of the duty, just the time period within which the negligence claim can be brought.

Clarity in the contract would avoid conflict, uncertainty and expense because such a term would be clear, reasonable and in almost all cases appropriate. The interests of both clients and professional advisers would be served.

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.

18 January 2018

Heads Up, LADS!

Bermuda Corporate/Commercial Law


MJM Limited
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