Contributors
Whether a claim is time-barred is one of the first issues to consider in defending professional negligence claims. The fact that a professional has concurrent duties in contract and tort each with different limitation periods means that claimants can rely on whichever duty has the best outcome for them. Often a claim is brought in tort because the cause of action in tort runs from the date on which actionable damage is suffered. Depending on the facts, that may be some years after any breach of duty. However, what amounts to actionable damage is not always obvious particularly in solicitors' claims where the solicitors' negligence has exposed the claimant to a risk of loss. The recent Court of Appeal judgment in Elliott v Hattens Solicitors (a firm) [2021] EWCA Civ 720 provides some guidance. We examine the key issues for solicitors and their professional indemnity insurers.
What happened?
The solicitors were instructed in 2011 in connection with a property transaction by the claimant Mrs Elliott. This involved granting a lease of a property in Stanley Road, Grays, Essex to Mrs Elliott (her husband was the freeholder) and then preparing an underlease to a Mr Malster whose parents were to guarantee his obligations.
The lease, underlease and a rent deposit deed were executed on 24 February 2012.
In November 2012, a fire destroyed the Stanley Road property. It was uninsured and Mr Malster left without making good the damage. So not only was the property destroyed, Mrs Elliott had lost her rental income.
On 10 April 2018, Mrs Elliott issued proceedings against the solicitors seeking damages for negligence. She alleged that the solicitors failed to secure a guarantee from Mr Malster's parents and they also failed to advise her that she was obliged to insure the property. This was more than six years after the lease transaction but less than six years after the fire.
The issue
A claimant has six years from the date on which actionable damage is suffered to bring a claim in tort[1]. The key issue in the present case was whether the clock on actionable damage started running from February 2012 when the lease and underlease were executed or whether it was from November 2012 when the fire destroyed the premises.
The solicitors argued that because the document package they produced for Mrs Elliott did not include the parental guarantee which she thought she was getting, this meant that she got less than she bargained for. They said that this was actionable damage which triggered the cause of action in tort in February 2012 meaning the claim was statute-barred.
The claimant argued that, as a matter of fact, she had not suffered any loss prior to the fire. It had not been her intention to assign the underlease. It was never part of the purpose of the transaction. It followed that the fact that the absence of a guarantee might have reduced its value on assignment was unimportant. She argued that the fire in November 2012 was the event which triggered the cause of action in tort and, therefore, the action was not statute-barred.
The judge at first instance considered the authorities on contingent damage[2]. A contingent liability does not start time running – there must be actionable damage. The judge concluded that, on the facts, the claim was not statute-barred. Prior to the fire an ascertainable loss had not been suffered. He put significant weight on the fact that that the claimant never intended to assign the lease and the absence of the guarantee or insurance had not caused an issue prior to the fire.
The Court of Appeal disagreed and gave the following guidance on how to determine whether actionable damage has occurred in tort in cases where the solicitors' negligence has exposed the claimant to a risk of loss.
How to determine when damage has occurred in tort
In considering the issue, the Court of Appeal drew a distinction between the following types of cases:
- cases where the claimant would not have entered into the transaction in question at all but for the solicitors negligence - "no transaction" cases and
- cases where but for the negligence, the transaction would have been a better one - "flawed transaction" cases.
The present case was considered to be a "flawed transaction case" – Mrs Elliott would still have taken the lease of the Stanley Road property and granted an underlease to Mr Malster had there been no negligence but she would have had the benefit of a parental guarantee and she would have been advised of the need to insure the property.
In flawed transactions, the next question to consider is whether "the value to [the claimant] of the flawed transaction was measurably less than the value to [them] of the flawless transaction". The Court of Appeal had no hesitation in concluding that in the present case the answer was obviously yes – indeed an expert valuer would have been able to put a figure on it. In these cases, the cause of action accrues at the outset and a claimant cannot defer the limitation period by arguing that they did not plan to sell the asset.
Even if the value to the claimant of the flawed transaction is not measurably less than the value to them of the flawless transaction, the Court of Appeal acknowledged that a claimant can potentially still suffer relevant damage at the outset as the possibility of actual financial harm may be sufficient. It will depend on the facts.
It follows that flawed transaction cases should be distinguished from cases where a claimant has assumed a contingent liability. There is "something more" in these cases than a mere contingent liability – in this case there was, in fact, a measurable loss.
Comment
This decision provides a useful reminder that limitation does not always run from the date a loss becomes obvious in professional negligence claims.
When considering limitation in tort for professional negligence claims involving underlying transactions which exposed the claimant to loss, it is important to ask:
- is this a "flawed transaction" case – in other words but for the negligence would the claimant have entered into the same transaction but on better terms?
- if so, consider whether the claimant suffered some "immediate damage" at the outset of the transaction because they did not get what they should have got – in the present case the "package of rights" expected
- immediate damage will be something more than a mere contingent liability
- in such cases the cause of action accrues at the same time as the transaction and the claimant will not be able to defer the limitation period.
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[1] Section 2, Limitation Act 1980
[2] In particular, Law Society v Sephton & Co [2006] UKHL 22
