No limits

The Lords' ruling in Sephton provides welcome clarification of limitation rules in negligence claims, say Nicholas Heaton and Toby Rouse

The House of Lords' ruling in Law Society v Sephton [2006] UKHL 22 raised important issues under the Limitation Act 1980 that will be significant to anyone bringing or defending claims in negligence, and in particular to professionals and their insurers. The judgment considers when, in cases of economic loss, damage is suffered so as to complete the action and start the six-year limitation period running.

Section 2 of the Act provides that the general limitation period for tort claims, including negligence, is six years from the date on which the cause of action accrues. A cause of action in negligence accrues when actual damage is first suffered as a result of the defendant's negligent act or omission. In cases involving physical loss or injury it is normally obvious when this happens, but in cases of pure economic loss it can be difficult to determine when actual damage is first suffered. The Lords in Sephton considered this issue and in particular whether the limitation period starts to run when the claimant suffers a contingent loss.

Accounts certified

Over a period of six years ending in 1996, a solicitor misappropriated about £750,000 from his client account. During each of those years, a firm of accountants certified to the Law Society that they had examined the solicitor's accounts and were satisfied that they complied with the Solicitors' Accounts Rules.

In 1996 the Law Society discovered the misappropriations and intervened in the solicitor's practice. A number of the solicitor's clients subsequently successfully made claims for payment from the Solicitors' Compensation Fund, which in its discretion may pay compensation to those who suffer loss as a result of a solicitor failing to account for money. In 2002, the Law Society, as trustee of the Fund, sued the accountant, seeking damages for negligence in respect of the sums paid out. The claim was made on the basis that the payments by the Fund could have been avoided if the accountants' reports had disclosed the true position on the solicitor's finances, allowing the Law Society to intervene earlier. The defendants argued that the action was time-barred under s 2.

The defendants argued that the Law Society's claim was out of time because it had been made more than six years after the Law Society first suffered loss. The defendants contended that the Law Society first suffered loss either when it relied on the negligent accountants' reports and as a result did not intervene in the solicitor's practice, or at the latest when a misappropriation first occurred after each negligent report. At that point, the Law Society was exposed to the risk of a claim against the Fund. Although this was a contingent liability (ie, one that may arise in the future in certain circumstances) this, they contended, was sufficient to complete its cause of action and start the limitation period running. The Law Society argued that it had suffered actual damage only when it had exercised its discretion to meet a claim made against the Fund or at the earliest when a claim was made against the Fund and so its claim was not out of time.

Claim not statute-barred

The House of Lords held that the claim for negligence was not statute-barred. Damage did not occur when the money was first misappropriated following receipt by the Law Society of a negligent report, but when a claim was first made against the Fund.

The Lords held that a contingent liability alone does not constitute damage and so cannot complete a cause of action in negligence and start the limitation period. Lord Hoffmann said: 'A contingent liability is not as such damage until the contingency occurs.' He went on to explain that, in some circumstances, the existence of a contingent liability may give rise to an immediate loss and so start the limitation period running if, for example, its existence depresses the value of other property 'or it may mean that a party to a bilateral transaction has received less than he should have done, or is worse off than if he had not entered into the transaction'. But standing alone, the contingent liability is not damage. Hoffmann concluded 'the possibility of an obligation to pay money in the future is not in itself damage'.

The Lords went on to distinguish various Court of Appeal decisions that could be read to indicate that contingent liability might amount to damage, on the basis that in those cases the contingent liability had in fact given rise to immediate damage.

Even if a contingent liability was sufficient to cause provision to be included for it in accounts because it was likely to arise, this did not mean it should be treated as damage giving rise to a cause of action that, Lord Hoffmann said, 'connotes a legal obligation and its existence must be determined by rules of law'. Terms used in some earlier cases such as 'detriment' and 'worse off' were not, in Lord Walker's view, sufficiently precise. A risk of future economic loss might be considered to be to the claimant's detriment and he may be considered worse off, but he has not necessarily suffered loss such that a cause of action accrues.

In this case, the Law Society had suffered no loss until a claim was made on the Fund and the mere risk of such a loss was not sufficient for the accrual of a cause of action.

Important clarification

This case is important in clarifying a difficult area of the law concerning when a cause of action in negligence accrues. The Lords decided the relevant time is when actual damage has occurred that is capable of assessment in monetary terms. The risk of a future liability alone is not sufficient. In some circumstances the risk of future loss may cause damage to be suffered immediately, particularly in cases involving entering into transactions. However, even in such cases, careful thought will have to be given as to whether damage has been suffered at the time of the transaction.

This decision will allow a claimant in some circumstances to argue that although it did suffer some detriment at an early stage, this was only a contingent loss and so the limitation period did not start to run until a later date, when actual damage was first suffered.