Know your limitation

Date: 
27 October 2017

Verbose but unambiguous. David O’Brien discusses S 14A & the parameters of limitation

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  • The interpretation of s 14A of the Limitation Act 1980 in the case of Halsall.
  • Whether the courts are applying s 14A correctly, and whether the current approach could lead to litigation where loss is still speculative.

A number of hot topics in the professional negligence arena came before Mrs Justice Moulder in the recent case of Halsall and Others v Champion Consulting Limited and Others [2017] EWHC 1079 (QB), [2017] All ER (D) 44 (Jun). The result ultimately turned on the application of s 14A of the Limitation Act 1980 (LA 1980) and the claim, which otherwise would have succeeded, was dismissed as statute barred. But was the decision on limitation correct?

The facts

The defendants were tax advisers who, in 2003, advised the claimants to invest in charity shell and film schemes. The schemes involved the purchase by the claimants of shares in certain companies, which the defendants assured them would ultimately result in tax relief.

In breach of duty, the defendants failed to advise the claimants that the valuation of the shell companies upon flotation was critical, wrongly advised them that the maximum loss to be suffered in the film scheme was the initial investment, and failed to advise them that there was a significant risk that the schemes would successfully be challenged by HMRC.

By 2012 at the latest, all claimants were aware that HMRC was investigating the schemes and knew enough about the risk that the schemes would fail to justify investigating whether the defendants had acted negligently.

The finding on limitation

Uncontroversially, the judge found that the claimants suffered damage, and the cause of action thereby accrued, when the claimants contracted to purchase the shares. This was not because the shares were at that point worth less than the claimants paid for them, but because the purchase of the shares would not give them the result that the defendants had assured the claimants it would. It was not inevitable at that point that the claimants would, in fact, be denied the tax relief, and they may even have been financially better off as a result of being exposed to the risk, but it was at that point that they were ‘tied into the commercial straitjacket’. Accordingly, it was found that the primary six-year limitation period in tort began to run at that point, and had expired before the claim was issued in March 2015.

The question was therefore whether, in relation to the charity shell scheme, the claimants took the benefit of an extended limitation period under s 14A of LA 1980, on the grounds that they did not acquire both the knowledge required for bringing an action and a right to bring such an action any time before three years before the claim was issued.

Applying the authorities, the judge made the following finding at para [245] of the judgment: ‘The question is whether there was something which would reasonably cause the claimants to start asking questions about the advice they had been given, not when they first knew they might have a claim for damages but when each of them first knew enough to justify setting about investigating the possibility that [the defendant’s] advice was defective.’ Applied to the facts, the judge found that such a date was more than three years before the claim was issued and the claim was, therefore, statute barred.

Section 14A

Section 14 A is verbose but unambiguous. In cases to which it applies, it disapplies the primary six-year limitation period in tort set by s 2 of LA 1980 and replaces it with a three-year limitation period starting from ‘the earliest date on which the plaintiff or any person in whom the cause of action was vested before him first had both the knowledge required for bringing an action for damages in respect of the relevant damage and a right to bring such an action’. (s 14A(4)).

It is prescriptive of what counts as that knowledge and provides, among other things, that ‘the knowledge required for bringing an action for damages in respect of the relevant damage means knowledge both of the material facts about the damage in respect of which damages are claimed and of the other facts relevant to the current action mentioned in subsection (8) below’ (s 14A(6)). It also provides that ‘the material facts about the damage are such facts about the damage as would lead a reasonable person who had suffered such damage to consider it sufficiently serious to justify his instituting proceedings for damages against a defendant who did not dispute liability and was able to satisfy a judgment’. (s 14A(7).)

Analysis

Whereas the judge came to her conclusions by applying the authorities, it is difficult to reconcile the findings with the clear wording of s 14A.

  • First, the wording of s 14A discloses an important distinction between, on the one hand, the suffering of damage, ie in this case, the worsening of a claimant’s lot by its commercial straitjacket and, on the other hand, the right to bring an action for damages, ie monetary compensation, quantifiable in some way or another, for the claimant’s loss.
  • Second, but closely connected, s 14A is not about knowledge of damage. It is about knowledge of material facts about the damage which would cause a reasonable person to institute proceedings. The idea that one of those facts is not that the damage has caused, or at least will cause, the claimant some actual financial loss, is difficult to conceive.
  • Third, s 14A is concerned with the time at which a claimant has the right to, and it would be reasonable to, institute a claim for damages. Not an indemnity for potential future losses. Not a declaration of liability. Damages. This is particularly difficult to reconcile with the finding at para [245] of the judgment that: ‘The question is… not when they first knew they might have a claim for damages but when each of them first knew enough to justify setting about investigating the possibility that [the defendant’s] advice was defective.’
  • Fourth, can it really be said within the meaning of s 14A(7) that it would have been reasonable for the claimants to institute a claim for damages against the defendants, even if the defendants did not dispute liability, at any time before the claimants knew that any actual financial loss would be suffered, and in circumstances where there might even be a financial gain? For what purpose would a claimant, or indeed a defendant, wish reasonably to embark upon litigation that may be entirely academic, at a time when the most important fact to be known about the damage, namely whether it would ever result in any crystallised loss, would only come to light at some later date? And why would Parliament have wished them to?

“ It is surprising that one practical effect of LA 1980 is to force parties into litigation at a time when it is entirely speculative that any actual financial loss will arise from the negligence in question”

Whereas these points arise directly from the wording of s 14A, they are not addressed head on in the judgment, and it is not clear to the outside observer the extent to which they were before the court. Rather, if the judgment reflects the current state of the law on s 14A, then the state of the law would appear to: (a) conflate the occurrence of damage with the occurrence of a right to bring an action for damages; (b) conflate mere knowledge of damage with knowledge of necessary, relevant facts about that damage; and (c) render of no effect the essential element of s 14A(7) that the hypothetical action to be instituted by the reasonable claimant is an action for damages, and not some other remedy arising from the breach.

Conclusion

It is surprising that one practical effect of LA 1980 is to force parties into litigation at a time when it is entirely speculative that any actual financial loss will arise from the negligence in question. Whereas there are arguments to the contrary (eg why is there no similar provision in relation to breach of contract?), one purpose of s 14A would appear to be to prevent such a situation. The fate of Halsall remains to be seen but, as it stands, the approach of the courts to the correct application of s 14A remains a matter of great interest to professional negligence lawyers. 

David O’Brien is a senior associate in the group litigation team of Penningtons Manches LLP (david.o’brien@penningtons.co.uk; www.penningtons.co.uk ).

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