Know your limitations

Keith Ryan reports on a recent case which makes it easier to sue a professional adviser

A recent decision by the House of Lords could open the floodgates to legal actions for negligence against professional advisers. Accountants, solicitors, architects and surveyors can now be sued about disputed events which happened many years ago.

All the client has to do is allege that some negligent act or omission occurred and that this was covered up. The House of Lords case has in effect extended indefinitely the time limit during which an adviser can be sued – previously it was six years in most cases.

The decision was made in Sheldon (and ors) v RHM Outhwaite (Underwriting Agencies) (and ors) on 4 May 1995. In that case, 500 Lloyd's Names claimed in respect of substantial losses in 1982, outside the six-year period.

To overcome this hurdle, the Names sought to rely on a provision of the Limitation Act 1980 by alleging that the defendants had deliberately concealed their own breaches of duty, thereby denying the Names the knowledge of their right to sue.

The Law Lords ruled that if a defendant concealed his or her own negligence subsequent to it taking place, the clock started running from the point when the concealment was, or ought reasonably to have been, discovered. Potential plaintiffs now have six years from that date to initiate legal action.

There are fears the courts could become clogged up with cases brought by people who can now decide to bring an action against professional advisers over an event that could have happened decades ago.

It is easy to make an allegation that a professional adviser has concealed something and thus bring a case to court. Proving it may be more difficult.

In future, the two areas, whether there has been subsequent concealment and whether there has been negligence, will be tried together making cases much more complex. Expert evidence may determine whether something was concealed. The events in dispute could also have happened a considerable time ago, making the facts of the case even more difficult to establish.

The situation which the Law Lords' decision has left is highly unsatisfactory. In effect, clients have an open-ended right to make claims against their professional advisers.

Professional advisers are faced with a position where they are vulnerable not only if they act deliberately to cover up their negligence, but also if they omit to report something. From now on they are going to have to be even more vigilant to make sure they tell their client every little matter or detail. This could have serious implications for the way they conduct their business.

People are much more willing to sue their advisers these days and litigation against professional advisers has boomed over the past 10 years. The new House of Lords ruling could affect advisers' professional indemnity policies by increasing the number of claims.

Ironically, these claims will also be felt by Lloyd's Names, who underwrite much professional indemnity insurance within the Lloyd's market.

In the Names' case, they still have to prove that concealment has taken place. They are claiming that underwriters Outhwaite deliberately omitted the extent of the potential risk in its annual report. The underwriters deny deliberate concealment or negligence and, if necessary, will take the case to the highest court possible.

The fact that the case had to go as far as the House of Lords and that each decision was finely-balanced shows the unsatisfactory nature of the outcome. From the Commercial Court, right through the Court of Appeal, to the House of Lords, the issue was considered by nine judges. Four of the judges felt that the limit should not be extended and five felt it should be. One of those in the three-to-two House of Lords ruling even said he would have preferred a third interpretation, which was that if a subsequent concealment occurred, time would stop running until after the discovery, but only the unexpired portion of the six-year period. The wording of the law, however, would not allow him to rule in this way. So in the end he ruled that the period should be extended.

One of the other judges in the House of Lords decision said Parliament had failed to deal adequately with subsequent concealment, but it was a gap that they could not fill. That is why Parliament should take action to reintroduce pragmatism and fairness, before professional advisers are faced with a barrage of litigation.

Kevin Ryan is a partner with Denton Hall's Insurance and Reinsurance Group.