Time sensitive

Despite two recent cases in the House of Lords, limitation law has become an increasingly grey area, say Stuart Hall and James Robertson

With the World Cup upon us, you might say the result of the House of Lords’ two recent limitation decisions is a score draw – May’s decision in Law Society v Sephtons went in favour of the claimant, whereas the defendant won March’s decision in Haward v Fawcetts.

But beneath this apparently benign scoreline is a concern that these decisions have rendered the key principles of limitation law uncertain and fact-sensitive. Indeed, they emphasise the validity of the Law Commission’s 1998 conclusion that “the present law on limitations suffers from a number of defects: it is incoherent, needlessly complex, outdated, uncertain, unfair and wastes costs… solicitor[s] can be forgiven for approaching the law of limitations with a considerable degree of trepidation. Certainly there are numerous pitfalls for the uninitiated”.

There are, therefore, lessons to be learned – both for solicitors facing increasingly stale negligence claims, and, in terms of risk management, for those advising and acting for claimants.

Law Society v Sephtons

Sephtons prepared ‘accountants’ reports’ in respect of the years 1988 to 1995 about a solicitor’s practice for submission to the Law Society, but failed to spot that the solicitor had been stealing his clients’ money throughout.

This finally came to light in April 1996 when a client complained to the Law Society, which, through the Compensation Fund of which it is trustee, was then required to compensate the defrauded clients. The Law Society sought to recover those payments from Sephtons as damages for the negligent reports. Proceedings were issued in May 2002 – within six years of the first compensation payment, but more than six years after Sephtons’ first negligent report.

It was common ground that the primary six-year limitation period started to run when the Law Society suffered ‘damage’ – the issue for the House of Lords was what ‘damage’ meant.

Since the 1982 decision in Forster v Outred, the courts have held that ‘damage’ means “any detriment, liability or loss capable of assessment in money terms, and it includes liabilities which may arise on a contingency”. But what is ‘detriment’ and a ‘contingency’ for this purpose?

The House of Lords’ decision

The House of Lords ruled that time only started to run against the Law Society from (at the earliest) the date on which a defrauded client first presented them with a valid claim. Although the Law Society was exposed to the risk of such claims as soon as the solicitor stole further money following each of Sephtons’ negligently clean reports, this was a mere ‘contingency’ that did not count as ‘damage’ and did not start time running.

Although the Forster v Outred approach has not been abandoned, the House of Lords has reinterpreted what “detriment, liability or loss” means. There are now at least three different categories of case in which tests may apply for determining if ‘damage’ has been suffered.

You may enter into a transaction under which, because of the defendant’s negligence, you impair your assets or acquire defective rights or assets, and damage will be suffered even if there are still outstanding contingencies that might affect your financial loss. For example, in Forster v Outred, Mrs Forster charged her home to secure her son’s borrowings as a result of her solicitor’s negligence – the value of the equity in her home was reduced, even though it was many years before she was required to pay.

However, entering an agreement that affects your legal position will not automatically mean you suffered loss at that stage – if you acquired some benefit as a result of the transaction, damage may only be suffered if and when an adverse balance is struck between the overall benefits and burdens. This is illustrated by the House of Lords’ decision in Nykredit Mortgage Bank v Edward Erdman Group (1997), where a loan was made in return for inadequate security – damage was only suffered when the amount lent exceeded the value of the personal covenant and the realisable security. Alternatively, you may incur a contingent liability – a risk that you will incur a financial loss upon the happening of a future event. Damage is then only suffered when the event occurs and the financial loss results. Sephtons is an example of this. A hypothetical example (using the Forster v Outred scenario) is if Mrs Forster had merely given a personal guarantee of her son’s borrowings rather than charged her home – the damage would then only have been incurred when she was required to pay.

The implications

The other recent limitation decision of the House of Lords, Haward v Fawcetts, has been extensively reported since it was handed down in March. It concerned the alternative three-year limitation period that runs from the date on which the claimant first had the knowledge required for bringing proceedings.

Both cases demonstrate the continuing difficulty at a judicial level over striking the right balance between protecting defendants from stale claims, but not unfairly shutting out claimants. The various substantive judgments in each case differ in crucial respects and they each emphasise factual distinctions that have not previously existed or been emphasised in quite the same way. In the short term there is, therefore, likely to be a good deal of litigation working out the precise ramifications.

In the longer term, although these decisions do not alter the landscape in any fundamental way, they are likely to have negative effects for solicitors facing negligence claims. Both decisions provide ample ammunition for claimants seeking to construct ways around limitation defences. Sephtons shows that the basic six-year period can mean 14 years in practice and Haward shows that the precise requirements of ‘knowledge’ are still very flexible.Even if unmeritorious arguments can be resisted, it is likely to become more difficult to dispose of limitation issues without a trial on the facts. This would make proceedings longer, more expensive and unpredictable – it may also mean greater publicity for an episode perhaps best forgotten.

There are risk management lessons here, too. The same factors that benefit claimants by extending time also mean uncertainty in knowing exactly how long proceedings can be delayed. Solicitors who get this wrong when acting for claimants may find it impossible to defend the inevitable charge of negligence.

The prudent advice must be to issue early and on a cautious analysis of the date of accrual of the cause of action. The protocols do not stop time running and equally do not prevent the issue of a protective claim form – if necessary, the court can be asked to stay the proceedings. Alternatively, the defendant can be asked for a standstill agreement, which should be clearly and formally recorded to prevent any disputes.

Defendants’ solicitors will also wish to insist on clarity in their dealings with claimants to avoid estoppel or waiver arguments following any delay in issuing proceedings during protocol compliance or negotiations. The attempt to establish estoppel in Sephtons illustrates the broad scope for such arguments to be run.

The need for reform

The Law Commission’s draft reform bill was accepted in principle by the Government in 2002 – the best guess is that parliamentary time may be made available for it in the 2007-08 session. It is unclear, however, how much difference these reforms will actually make. The Law Commission’s ‘core regime’ would apply a version of the existing three-year knowledge period to all contract claims as well as the tort of negligence, which could exacerbate the Hawards difficulties over exactly what ‘knowledge’ means. The likelihood of resolving these limitation problems, therefore, appears every bit as uncertain as England’s prospects at the World Cup.

Stuart Hall is a partner and James Roberts is an associate at Barlow Lyde & Gilbert