Stopping the clock

THE CASE OF Watkins v Jones Maidment Wilson [2008] EWCA 134 is timely. Economic slowdown and falling property markets have prompted many businesses actively to review what losses might now be recouped through litigation, and a key issue will be for how long potential causes of action survive.

A cause of action in tort is complete only when actual damage is sustained, and this potentially means that claims may be brought many years after the acts complained of. On that basis Law Society v Sephton [2006] UKHL 22 allowed a claim brought up to 14 years after the negligent acts; conversely, the Watkins case applies a much stricter approach.

Watkins

On legal advice, Dr and Mrs Watkins contracted with developers to buy land with a completed house, but with the option to take the unfinished building at a reduced price, as assessed by a surveyor, in the event that the developers failed to finish the house by a certain date. However, on further legal advice, they later agreed to waive that option, something they came to regret when complications arose. The ensuing dispute with the developers proved costly and caused delay. More than six years after they had agreed to waive the option, they sued their solicitors for negligent advice.

Nykredit argument

In attempting to defeat the solicitors' limitation defences, the Watkins' first argument was that merely entering into the contract had not caused them to be financially disadvantaged. Properly advised, they said they would have tried to negotiate better terms, but would have been unsuccessful in this, so the transaction would not have proceeded. Entering the agreement had been beneficial to them overall, and it was only later, when the building was defectively constructed, that they became financially worse off by having entered the transaction.

In considering this argument, a starting point is the formulation, referred to in Sephton, from Forster v Outred [1982] 1 WLR 86 CA, that actual damage was 'any detriment, liability or loss capable of assessment in money terms, and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control'. In Forster, the Court of Appeal held that the claimant suffered 'actual damage' at the moment when she charged her home as security for her son's business borrowings, and not later when her son's creditors called upon the security. That was so even though the creditors may never have called on their security if, for example, the son's business had proved successful. That general formulation was not helpful to the Watkins' argument.

The House of Lords in Nykredit Mortgage Bank v Edward Erdman (No 2) [1997] 1 WLR 1627 HL(E), also cited the formulation in Forster quoted above, but described an important exception. The claimants in Nykredit were lenders whose security was valued negligently, and who would not have lent but for the negligent survey. The court contemplated circumstances in which lenders may not be financially worse off immediately on entering the transaction, but may become so later. The borrower may not default, and even if he does, the overvalued security may be sufficient. In such cases, at the outset 'financial loss is possible, but not certain. Indeed it may not even be likely'. The date when any loss was first suffered would depend on the facts of each case and although it was said there could be 'evidential and practical difficulties' in determining that date, those were 'not difficulties in principle'. The Watkins contended that this exception applied to their situation, in that until the building work progressed unsatisfactorily, they had not become financially worse off by entering into the contract.

The court's ruling in Watkins was that, in the absence of allegedly negligent advice, the Watkins would have had a chance to negotiate better contractual terms. Accordingly the Watkins suffered a loss of chance at that point, and this was an immediate loss which completed the cause of action in tort. The fact that they may have suffered further loss at a later stage was not relevant in circumstances where the cause of action was already complete.

It may be worth noting that another slightly earlier case on this same Nykredit exception argument was decided differently, although this judgment had not been given at the time of the hearing in Watkins. In Shore v Sedgwick Financial Services [2007] EWHC 2509 (QB), a claimant who transferred from one type of pension arrangement to another was held not initially to have been any worse off by doing so, but that when annuity rates fell substantially at the end of the 1990s, he became so. On suing his financial advisor, his cause of action accrued at the time when annuities fell, rather than the earlier time when on advice he made the transfer. In fact even this delay in the accrual was not long enough to help. In that case there is a reference to the concept of a 'materialisation of a risk', that being the event which triggered the accrual.

The distinctions between the outcomes in these cases are finely balanced and may not lend themselves to clearly stated principles. If it was fatal to the Watkins' argument that, properly advised, they would have had a chance to negotiate better terms, might not the same be said for the lenders in Nykredit or the pension fundholder in Shore? These questions will doubtless be explored by the courts in more detail, particularly if property markets continue to fall.

It is also possible that if the courts look again at the lending scenario described more than a decade ago in Nykredit, they may reach different conclusions, given the more sophisticated state of the current mortgage market. In particular, the widespread trading by lenders of their books of mortgage debt confirms that a mortgage may have a market value that depends on its quality, and which could be diminished if the valuation is negligent even if there is no default or insufficient security. It is therefore possible that a significant fall in the property market may not, in the prevailing climate, necessarily be seen as the first time that actual damage is suffered.

Sephton argument

The Watkins' second argument focussed on the legal advice on which they took the disastrous decision to surrender the option to take the house in an unfinished state. Had they not done so, it was claimed, at some point they would have exercised the option, so enabling the swift resolution of the dispute to their satisfaction. However they said that no loss was suffered at the time they agreed to waive the option because at that point only negligible defects had arisen during the house's ongoing construction. It was only some months later, the Watkins asserted, that the defects came into being and the Watkins sustained the loss that would have been avoided had the option still been available. The Watkins argued that, at the time of surrendering the option, any loss from doing so was purely contingent on the manner in which the house would be built.

In support of this argument, the Watkins turned to Sephton. As noted already, that case allowed a claim to be brought up to 14 years after the negligent acts. Sephton was widely seen as further encouragement to claimants seeking to overcome potential limitation difficulties.

Sephton was a firm of accountants which prepared accounts for a sole practitioner solicitor for submission to the Law Society. From 1988, Sephton failed to spot that the solicitor was misappropriating client funds. A client's complaint in April 1996 led to the Law Society's investigator discovering on

17 May 1996 a huge deficit of more than £750,000 in the solicitor's client account. The Society compensated former clients from October 1996, but proceedings were not issued against Sephton until 16 May 2002.

Sephton contended that the Society first suffered damage when the solicitor made a payment after the first negligent report. However, the court held that at that stage there was no more than a risk of future claims against the Society, and that this 'purely contingent loss' was insufficient to constitute actual damage. Instead, time only began to run when the Society received a valid claim by a defrauded client, and so the claim was not barred by limitation.

The basis of the court's refusal to apply this analysis to Watkins was that although the surrender of the option did indeed expose the Watkins to a contingent liability, it also caused them immediate loss. That was because the option itself was a valuable right, and the surrender of it was the loss of

something of value. The fact that an event may expose a claimant to contingent loss does not preclude that event from causing immediate actual loss.

No doubt the ruling in Watkins will calm those who feared that Sephton would lead the courts to be more ready to find delay in the accrual of the cause of action. It is perhaps too early to conclude that scenarios giving rise to the result in Sephton will be rare, but it does seem likely that in many cases the judgment in Sephton will be interpreted in a way that sees reliance on negligent advice as causing immediate loss.

Implications

More reported cases will in time further elucidate the courts' approach. Yet the indication from Watkins is that the courts will continue, on the whole, to be relatively unenthusiastic about finding that accrual of the cause of action in tort has been long delayed. It is likely to prove only in unusual or particular scenarios that this is so.

There has been an increasing trend towards limitation becoming an issue of fact rather than law, and often it will not be possible for the question to be determined at an interim stage. In Watkins there was a trial of preliminary issues, while in Shore there was a full nine-day trial before the limitation defence was established.

This experience tends to bear out the comment in Nykredit that establishing when the cause of action accrued may present evidential and practical difficulties. If that is so, a trial of limitation as a preliminary issue may well be appropriate.

For solicitors who represent claimants, there is an acute need to ensure that misunderstandings do not result in claims being issued too late.

Conversely, defendants may find that Watkins gives added force to their limitation arguments.