The House of Lords provides further clarity on the Limitation Act 1980

By Eve O'Brien and Andrew Symons

There are a number of recent high profile cases which seek to provide clarity to the provisions of the Limitation Act 1980, in particular section 2, which prescribes that, in tort, a cause of action accrues six years from the date of the breach, enabling potential litigants to recognise when a cause of action accrues and the time in which to bring a claim starts to run in tort.

In the recent case of Law Society v Sephton, the House of Lords (led by Lord Hoffmann) considered whether, in a case of professional negligence, a cause of action in tort accrued from when the Claimant incurred a contingent or an actual liability.

The Lords' unanimous verdict turned on when the damage to the Claimant actually occurred, not when the possibility of damage in future became known.

Law Society v Sephton provides both a useful summary of recent case law and a guide to both potential claimants and professionals in understanding when time starts to run in order to avoid an adverse situation when a legitimate claim is time barred.

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Summary

There are a number of recent high profile cases which seek to provide clarity to the provisions of the Limitation Act 1980, in particular section 2, which prescribes that, in tort, a cause of action accrues six years from the date of the breach, enabling potential litigants to recognise when a cause of action accrues and the time in which to bring a claim starts to run in tort.

In the recent case of Law Society v Sephton, the House of Lords (led by Lord Hoffmann) considered whether, in a case of professional negligence, a cause of action in tort accrued from when the Claimant incurred a contingent or an actual liability.

The Lords' unanimous verdict turned on when the damage to the Claimant actually occurred, not when the possibility of damage in future became known.

Law Society v Sephton provides both a useful summary of recent case law and a guide to both potential claimants and professionals in understanding when time starts to run in order to avoid an adverse situation when a legitimate claim is time barred.

Background

The case originated from the misappropriation of client funds by a solicitor, a Mr Payne. Mr Payne negligently misappropriated his clients’ money and managed to avoid detection for over six years.

In accordance with the Solicitors’ Account Rules, Mr Payne had his books and accounts annually audited by a firm of qualified accountants, Sephton & Co. From 1989 to 1995, Sephton negligently certified to the Law Society that Mr Payne’s accounts complied with these rules. The Law Society relied on the certificates, in the sense that, if the report had not been delivered or had indicated that something was amiss, the Law Society would have investigated the position and discovered the theft of client funds.

In April 1996, a client of Mr Payne’s complained to the Law Society of a delay in payment. This complaint triggered an investigation by the Law Society in May 1996. The investigation revealed a deficiency in Mr Payne’s client account to the value of £750,000 and the Law Society intervened in his practice.

The Law Society, under its discretionary scheme, compensated the clients of Mr Payne, making payments of approximately £1.25m. The first claim was made in July 1996 and the first payment was issued in October of the same year.

In October 1996, the Society formally notified Sephton that it would hold it liable for compensation to Mr Payne’s clients following their negligent preparation/assessment of Mr Payne’s annual accounts.

There was a delay in issuing the claim form, as the Society concluded related litigation (Law Society v KPMG Peat Marwick) to establish whether a firm of accountants who provided it with annual certifications owed it a duty of care. Upon receipt of a favourable judgment (and after avenues of appeal had been finalised), the Society issued a claim form against Sephton. The claim form was issued in May 2002.

Sephton argued that the Law Society was time barred from pursuing a claim against it as the cause of action arose before 16 May 1996. Sephton alleged that the Society suffered damage from the dates of each misappropriation following submission of the accountant’s annual certificates. Such misappropriations gave the client a right to make a claim on the fund and, Sephton contended, liability to such a claim was damage.

The Law Society contended that even though it was faced with claims arising out of the solicitor’s negligence, it did not suffer any actual damage until it resolved (under its discretionary scheme) to make the first payment out of the compensation fund to a former client of Mr Payne.

The Law Society put forward a reasoned argument as to why it did not suffer any damage until it had received an actual claim. If the solicitor’s misappropriations had been repaid and/or set off against other client accounts (as had occurred in the past), the Society would not have been liable to these claims. As such, it argued that simply knowledge of a potential liability to a potential claim is not enough.

The judgments

At first instance, Mr Michael Briggs QC (sitting as a deputy judge in the Chancery Division) ruled against the Society on the grounds that a cause of action had accrued before 16 May 1996 (when it was aware of the accountant’s negligence) and therefore, that Sephton was able to rely on a limitation defence.

But both the Court of Appeal and then the House of Lords reversed the judge's decision on the basis that a cause of action could not (and did not) accrue until the Society had suffered a quantifiable loss in consequence of the solicitor’s negligence, i.e. when the first claim on the compensation fund was received (but not paid - the Lords did not accept the Society’s argument that the cause of action did not accrue until the first claim had been paid by the compensation fund).

Lord Hoffmann delivered the leading judgment.

After reviewing and citing his opinion on a number of recent cases, including Forster v Outred & Co [1982] and Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997], Lord Hoffmann’s view was that incurring the possibility of a future liability to make a payment is not a sufficient base upon which to make a claim as no actual loss has occurred. He said:

Therefore, it was not sufficient that the Law Society was at risk of having to meet claims arising from the solicitor’s negligence, even if that risk was real and likely. The possibility of an obligation to pay money in the future was not of itself damage.

Comment

1. Law Society v Sephton provides helpful clarity to a central aspect of the Limitation Act 1980, namely when a cause of action accrues in tort and when the time in which to bring such a claim begins to run. The House of Lords unanimously decided that a cause of action accrues in tort from the point when an actual claim is made and a quantifiable/ascertainable loss is suffered; a contingent liability is therefore not enough to start time running.
2. The position contrasts with cases where actual damage occurred at an earlier date. Thus in Foster v Outred [1982] the property in question had been mortgaged; in Knapp v Ecclesiastical Insurance Group plc [1998], a policy of insurance was voidable owing to a broker’s non-disclosure; and in Khan v Falvey [2002] a solicitor’s negligence meant that his client’s claim was susceptible to a strike out for want of prosecution.
3. The House of Lords decision, whilst having broader application in certain circumstances, does not represent a radical departure from the court’s general approach to issues of limitation. Lord Hoffmann cited with approval the principle enunciated by Lord Nicholls in Nykredit [1997] in which he said that "within the bands of sense and reasonableness the policy of the law should be to advance, rather than retard, the accrual of a cause of action". Accordingly Sephton is largely a decision on its particular facts.
4. Much of the case law on limitation in recent years has concerned the interpretation of s.14A Limitation Act 1980 under which a claimant has a period of three years from date of knowledge (as defined) to bring a claim in tort (as to which see our Law-Now (1 March 2006) on the House of Lords decision in Haward v Fawcetts (A Firm) (to read more about the Haward v Fawcetts case, click here).

In Sephton, s.14A was of no assistance to the Law Society as they had the requisite knowledge for approximately six years prior to the commencement of proceedings.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 19/05/2006.