A present danger: Primary limitation in professional negligence

In this article we examine the primary limitation periods that apply to most professional negligence claims, as well as the dangers that they present for potential claimants.

We have produced a separate article on the secondary limitation period that can also apply to professional negligence claims, which may be read in conjunction with this article. This can be accessed here.

For those approaching the issue of limitation for the first time, or seeking brief answers to some of the frequently asked questions in this area, we have also produced a short guide to the time limits that apply to professional negligence claims. This can be accessed here.

A primary issue

The importance of limitation periods in professional negligence claims should not be under-estimated. Once the limitation period for a claim expires, the claim can no longer be commenced. This is so regardless of whether the financial loss suffered is substantial or the claim has considerable merit.

For this reason, limitation is one of the first issues that should be considered as soon as there is reason to believe that a mistake has been made by a professional adviser and/or that financial loss has occurred.

Primary limitation period

The primary limitation periods are usually the starting point in determining the time limits for commencing a claim for professional negligence. They can be found in section 2 and section 5 of the Limitation Act 1980. Respectively, they apply to claims in negligence and simple contract, both of which are capable (collectively or independently) of forming the legal basis for a claim for professional negligence.

Claims in negligence

Negligence is the most common type of legal claim pursued against professionals. In part, this is because such claims can also be pursued against professionals by third parties, who may not have instructed the professional directly but who may nevertheless have suffered loss as a consequence of a mistake made. It is also because the limitation period for bringing such claims can expire later than those in simple contract.

Section 2 of the Limitation Act 1980 provides that:

‘An action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued.’

Once it is known that a claim in negligence is ‘an action founded on tort’, this statutory provision may appear both clear and innocuous. However, looks can be deceiving, as they are here, and in practice this provision can be complicated to apply.

In claims for professional negligence, it is necessary for financial loss to occur in order for a claim in negligence to accrue. However, such loss can occur both at different times and in a variety of different forms and degrees, so that it is not always readily apparent from what point time starts to run.

Evidence of this can be found amongst the ruins of a multitude of claims demolished by section 2. We set out some of the better-known examples below.

Forster v Outred & Co

Here the claimant instructed the defendant firm of solicitors to act for her in relation to the grant of a mortgage over her home, the purpose of which was to secure a business loan for her son. However, after the claimant’s son became bankrupt, the claimant herself was forced to discharge the mortgage to ensure that her own property was not sold to repay the debt. The claimant commenced a claim against her former solicitors for failing to advise her fully when she granted the mortgage.

The issue arose, on the assumption of negligence by the solicitors, whether the claimant suffered loss when she executed the mortgage, or only when demand was first made by the lender. She would have been time-barred on the first footing, but not on the second.

On appeal it was held that the claimant suffered actual damage upon entering into the mortgage, the effect of which was to encumber her interest in the property with a legal charge and to subject her to a potential financial liability. Therefore, the claim was time-barred.

Shore v Sedgwick Financial Services Ltd  

Here the claimant was the managing director of a substantial company. In April 1997 and on the recommendation of the defendant financial advisers, he transferred the benefits of his occupational pension scheme into a pension fund withdrawal (PFW) scheme. The claimant then commenced draw down later the same year. However, by early 1999 annuity rates had fallen and by 2000 so too had Government Actuaries Department (GAD) rates, both causing the value of his pension to be considerably reduced. The claimant eventually consulted a solicitor and commenced legal proceedings for negligence against his financial advisers on 29 September 2005.

For limitation purposes, the claimant alleged loss was first suffered (i) in early 2005 when he first suffered a cumulative loss of income; or (ii) in 2000, on his 60th birthday; or (iii) in 2000, when revised GAD rates reduced his income.

However, on appeal, it was held that damage occurred in April 1997 upon the transfer of the pension fund. This was notwithstanding that the transfer price paid for the PFW investment represented market value or that, depending on the vagaries of the market, the claimant could at the point of transfer have been financially better off under the PFW scheme.  Therefore, the claim was time-barred.

Pegasus Management Holdings SCA & others v Ernst & Young

Here the claimant was the owner of an electronics manufacturing business, which he sold for a substantial sum in 1997. On 2 April 1998 and on the advice of the defendant firm of accountants, the claimant purchased $150m of shares in a newly incorporated off-shore holding company, Pegasus. This was for the purpose of securing roll-over relief and to mitigate the tax liabilities arising from the sale of his business. However, due to flawed advice from the defendant, unforeseen and otherwise avoidable tax liabilities arose in connection with the disposal of businesses subsequently acquired by Pegasus, the first of which occurred in 2003. The claimant eventually commenced legal proceedings for negligence against his accountants on 10 November 2005.

For limitation purposes, the claimant alleged that by 2 April 1998 there was no more than a possibility of damage, as Pegasus might not have acquired the businesses that it did nor disposed of them. He further alleged that actual damage only occurred in 2003, when a tax liability arose upon its first business disposal.

However, both at first instance and on appeal, the court concluded that damage had been suffered by 2 April 1998. This was not because the claimant’s shares in Pegasus were worth less than he had paid for them, but because those shares did not give him the control of a company with the characteristics to avoid the tax liabilities he subsequently encountered. Therefore, this part of the claim was time-barred.

Claims in simple contract

Where a professional has been instructed to act or advise in return for a fee, a service contract (also known as a retainer) will arise. If, in carrying out his or her instructions, the professional then makes an unreasonable mistake or error, a claim for breach of simple contract is likely to arise.

Section 5 of the Limitation Act 1980 provides that:

‘An action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued.’

Unlike claims in negligence, damage is not a constituent element of a claim in contract and is not, therefore, required for an action to accrue and for time to start running. However, a breach of contract is and while the severity of the breach is rarely an issue for limitation purposes, the duration of it can be.

Midland Bank Trust Co. Ltd v Hett, Stubbs & Kemp (A firm)

Here the claimant was granted an option to purchase a farm by his father. He instructed the defendant firm of solicitors to record the terms of the option in writing, which the claimant and his father then signed. However, the solicitors failed to register the option which, some seven years later, the claimant’s father was able to defeat by selling the farm to his wife.

For limitation purposes the claimant alleged that time started to run from the date upon which the option was defeated and that his claim in contract had been commenced in time.

The court agreed. It concluded that this was a case of omission, rather than error, and that the defendant’s obligation to register the option had continued to exist until such time as performance was rendered impossible. The claim in contract had therefore been commenced in time.

Bell v Peter Browne & Co

Here the claimant had instructed the defendant firm of solicitors following the breakdown of his marriage. He had advised them that he had agreed with his wife that the matrimonial home should be transferred into her sole name, but that he should receive one-sixth of the gross proceeds of sale, whenever that occurred. The transfer occurred but the solicitors failed to protect the claimant’s interest, either by arranging for a declaration of trust or mortgage to be prepared and executed, or by registering a caution. Eight years later the claimant discovered that his former wife had sold the house and spent the proceeds.

For limitation purposes the claimant alleged that time did not start to run until the date upon which the house had been sold and that his claim in contract had been commenced in time.

The court disagreed. On appeal, it concluded that the solicitors’ breach of duty (in failing to prepare or execute a formal declaration of trust or register a caution) occurred at the time of or shortly after the transfer. This was so even though the breach was capable of being remedied up until the claimant’s former wife had sold the house. The claim in contract was therefore time-barred.

Conclusion

As should be apparent from the above case examples, ascertaining the primary limitation period for a particular claim can be a complicated and uncertain process. While this article seeks to provide an insight into some of the issues that can arise, it is no substitute for obtaining legal advice.

If you consider that you may have grounds for pursuing a professional negligence claim, you should seek legal advice from a specialist solicitor without delay. By doing so you should avoid the danger of your claim becoming inadvertently time-barred. You may also afford yourself the opportunity to resolve your claim without the need to incur the cost of commencing court proceedings which can, depending on the value of your claim, be considerable.

If you would like to arrange an initial consultation with us, free of charge or commitment, please do not hesitate to contact us on 0800 195 4983 or by email at mail@pnclegal.com.

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