Court of Appeal revisits the position of when time runs for claim in professional negligence. Careful thought is required when assessing limitation periods where there is a delay between the negligent act and the loss crystallising.
The time when a cause of action accrues is critical when assessing whether that claim has been brought within the statutory limitation period. In England, Wales and Northern Ireland, the primary limitation period for negligence actions is six years from the date when the loss is suffered (note that in Scotland this is five years.)
Why is this important? It matters because if the claim is brought after six years from the date of loss, then the claim is out of time (subject to secondary limitation arguments and extended periods which are not covered in this article) and cannot be pursued. The limitation defence is an absolute defence, even if there had been clear breaches of duty.
It is also important as sometimes, particularly in property transactions, the actual loss may not occur at the same time as the negligent act.
For example, in a claim where a lender provides mortgage funding to a borrower to acquire a property and the property is negligently overvalued, while the borrower continues to pay the mortgage repayments, no actual financial loss has been incurred. But the value of the security is immediately less than was stated to be on completion. Has the loss been suffered on completion, or is it suffered only if the borrower defaults on the mortgage payments which may be never?
That decision is critical when deciding if a claim can be brought.
In Elliott -v- Haynes the Court of Appeal grappled with this point. The facts were relatively straightforward. Mrs Elliott instructed solicitors to act for her in connection with a grant of a lease of a workshop to her, which she would in turn then grant an underlease to a Mr Malster. She wanted Mr Malster’s parents to provide a guarantee but her solicitors failed to secure their signature on the relevant documents. They also forgot to advise her to insure the property even though she was obliged to do so under the terms of the lease. Perhaps predictably the workshop burnt down. Mrs Elliott lost her income stream and those losses were uninsured.
A claim was brought against her solicitors in negligence regarding the lack of properly executed and enforceable guarantees. But the lease documentation had been drawn up more than six years before. Her action in negligence was apparently time barred – she argued she had not suffered the loss until the property burnt down, and so was not out of time.
The court at first instance agreed with Ms Elliott and found that the loss did not occur when the lease was signed, as this was a contingent loss that had not actually crystallised and therefore the claim was not out of time. The Court of Appeal disagreed. They confirmed the following key points:
- In some cases it will be argued that had the solicitor not been negligent, then they would not have entered into the transaction at all (the no transaction case). In others the argument is that had it not been for the negligence the transaction would have happened but on different terms (the flawed transaction case).
- Where there is a flawed transaction case, the liability is for the difference between what the claimant actually got, compared to what it would have got had there been no negligence.
- The fact that the transaction was flawed, does not mean that the claimant has suffered actual damage when entering into that transaction. One must look at the facts of the case and assess whether damage is suffered on entry into the transaction, or at a later point in time.
- The risk of loss, to which a claimant is exposed as a result of the negligent act does not mean that the claimant has not suffered a loss because of such exposure – it can be the fact that the possibility of actual financial harm constitutes the loss.
- The court will consider whether the transaction had put the claimant in an objectively less favourable position than if the solicitors had not been negligent. In this case what mattered is whether the lease would have been more valuable if the rent had been guaranteed.
Looking at the facts of the case, the Court of Appeal held that the claimant received significantly less valuable rights to what she should have received. The presence of guarantors would have increased the value of the underlease and as a result the loss was suffered when the guarantee was not properly executed. This was more than six years ago and so the claim was out of time.
This is a useful authority that sets out the process to be considered that will determine when losses are incurred in negligence cases involving professional advisers. In summary, while each case will turn on its facts, if the claimant has objectively got something less valuable than they thought they were getting, because of the negligent act, then the cause of action may well accrue from the date of execution, and not the date when the loss manifests itself at a later point in time. Careful thought is needed when assessing the limitation periods for property related transactions where there is an apparent delay between the negligent act and the loss crystallising.