Time limits prevent legal actions being brought after certain periods of time but these rules are fraught with difficulty, as demonstrated again by two Court of Appeal cases reported in 2008. Either you have a right to sue or you are too late: there are no half measures, which is why clients need to be aware of the issue.
When a contract is breached there are six years from the date of breach to enforce the contract or seek damages. That is usually fairly straightforward; for instance, in personal injury where the rule is three years from the date of injury because the injured party generally knows promptly that they have a cause of action for breach of contract or personal injury. In negligence there are six years from the date on which the cause of action accrued, which means the claimant must have suffered actual damage, but this can cause great difficulty if the financial loss only occurs some time later. When did the claimant suffer the damage; when the negligent advice was acted on or when the financial loss revealed itself?
Pegasus v Ernst & Young (2008)
In Pegasus B sold a business and was advised by E&Y as to how to minimise his capital gains tax liability. They advised setting up a company to trade in the and invest in qualifying trades, taking advantage of reinvestment relief. B used about $150m to subscribe for shares in Pegasus, a new company set up for that purpose, on 26 March 1998. Pegasus started to trade from October 1999 but in October 2002 Pegasus discovered that by only buying shares in target companies rather than the underlying assets Pegasus was exposed to an increased CGT liability. On 10 November 2005 Pegasus and B issued proceedings against E&Y claiming that, had they been properly advised, this additional CGT liability could have been avoided.
The court found that B was barred from bringing a claim because over six years had passed from the date the scheme was set up, 26 March 1998. At that date B suffered a loss because his tax position was irretrievably altered. Although the shares in Pegasus were worth the $150m that had been paid for them, so there was no financial loss at that point, there was a loss in legal terms because B’s position had been altered against his interests.
Watkins v Jones Maidment Wilson (2008)
Another recent case, Watkins, also supports this somewhat unpalatable position. On 6 August 1998 the claimants, on legal advice, waived a clause in a building agreement that allowed them to terminate the contract and use expert determination to settle any dispute. A costly dispute between the claimant and their builder ensued. The claimants issued a claim against their solicitor on 26 August 2004 arguing that they were badly advised in waiving the termination clause because they later wanted to rely on that clause and their true losses only arose when an NHBC certificate was issued in September 1998.
The court found that the claimants had altered their position to their detriment by terminating the agreement on 6 August 1998 because they lost their chance to rely on the termination/expert clause. That was an immediate loss even though the financial consequences only became apparent in September 1998, hence they were out of time for bringing a claim against their solicitors.
Comment
The apparent injustice in these two cases stems from the fact that the damage in legal terms, which triggered the start of the six year period, was not an immediate financial loss. Nor was it known about by the claimants until some time later. The courts have examined all sorts of diverse types of damage such as mortgaging a property, buying a house jointly but without long leases for separate shares, loaning money based on a misrepresentation, or employing someone without an effective restrictive covenant. In all these cases the damage occurred when a contracting party failed to obtain the rights or benefits they expected, even though the financial consequences of the damage were in some cases contingent and didn’t reveal themselves for many years.
A claim might be saved by the provision in the Limitation Act that allows claims to be brought within three years of the date of knowledge that a claim exists. Perhaps the Pegasus claim might better have been issued before the relevant date in October 2005, within three years of the discovery that the tax scheme was flawed, rather than a matter of weeks later in November 2005.
What the case law makes abundantly clear is that each case turns on its facts and the enquiry as to when actual damage occurs is very tricky indeed. It is not as simple as time running from when negligent advice or misstatements are acted on, but is a matter of careful legal analysis of the facts to find out when actual damage occurred.
In
Watkins the claim was only issued a matter of 20 days too late. It is not apparent why the claim was not issued earlier, but with such a difficult area of law the prudent course surely has to be to take legal advice as soon as you are aware of a potential problem.
For more information on time limits preventing legal actions, please contact
Susan Hopcraft.
