Court of Appeal provides further clarification on the limitation period in fraud claims

A recent Court of Appeal decision has added to the case law considering the operation of section 32(1)(a) of the Limitation Act 1980 (the Act), under which the limitation period for bringing fraud claims does not start until the claimant discovered, or could with reasonable diligence have discovered, the fraud: Seedo v El Gamal and others [2023] EWCA Civ 330.

The court held that:

• where the limitation issue is being considered at the trial, after a decision on the merits, the question for the court is when the claimant discovered (or could reasonably have discovered) the fraud as found by the court, rather than the fraud as pleaded by the claimant in its statements of case; and
• where a claimant is deceived by more than one lie in connection with a transaction, the subsequent lies will not start a new limitation period running unless they give rise to a separate cause of action – which will turn on whether the lies were distinct and unconnected or made in furtherance of the same overall deceit.

In the present case, the court found that two misrepresentations regarding (i) the extent of an investor's ownership in a purchased property and (ii) the source of the purchase funds were both designed to conceal the same thing (the true ownership position) and were part and parcel of that deception. As the party could reasonably have discovered that deception once it became aware of the first lie, the limitation period started then, with the result that the fraud claim was statute barred.

In many cases where there are multiple misrepresentations in relation to a transaction, it will be difficult to predict whether a judge considering the limitation position would view them as distinct or part of the same deceitful scheme.  That uncertainty will often be compounded by the other major source of unpredictability where section 32(1) of the Act is invoked – the question of when there was enough information for the claimant to have discovered the deceit.

This issue is important for victims of fraud to bear in mind when the extent of the dishonesty is uncovered only gradually over a period of time. The decision reinforces that it will usually be advisable to investigate any suspicions in a timely manner, and not assume that if clearer evidence of deception comes to light at a later date the victim will then have the full six years (or other applicable limitation period) in which to commence proceedings. If the earlier suspected dishonesty can be viewed as part of the same deceptive scheme, the limitation period in respect of it could already be running or, in a worst case scenario (as here), have expired.

Background

Mr Seedo, a wealthy investor, approached Mr Salfiti (the solicitor) to assist him in acquiring a new investment property. Mr Seedo subsequently agreed to a proposal by the solicitor that they acquire a property together as a joint venture, each with 50% ownership.

After successfully bidding on a property, the solicitor then approached Mr El Gamal to take over the purchase of the property, on the basis that he (the solicitor) had paid the deposit but could not complete on the purchase. He told Mr El Gamal that he would lend him £69,500 (which was in fact Mr Seedo's contribution to the purchase price) until the resale of the property. The purchase was completed and the property registered in Mr El Gamal's name.

Mr El Gamal was initially unaware of Mr Seedo's involvement and believed the property was fully owned by him, subject to an obligation to repay the £69,500 to the solicitor. This changed in 2009 when Mr El Gamal received a letter (purportedly from Mr Seedo but actually sent by the solicitor) asserting Mr Seedo's 50% beneficial interest in the property and alleging breach of trust by Mr El Gamal in relation to his dealings with the property.

In 2016, the solicitor issued proceedings in Mr Seedo's name against Mr El Gamal. Soon after, Mr Seedo was alerted to the proceedings and subsequently realised that the property had been purchased in Mr El Gamal's name. Mr Seedo took over the action (which had been brought in his name, but not with his knowledge) and added the solicitor as a defendant.

The County Court upheld Mr Seedo's claims against the solicitor and found that Mr El Gamal held the property on trust for Mr Seedo in equal shares. It also allowed an indemnity claim by Mr El Gamal against the solicitor, based on claims for fraudulent misrepresentation, as well as breach of duties under the solicitor's retainer. It rejected the solicitor's argument that the indemnity claims were all statute-barred because Mr El Gamal could reasonably have discovered the fraud once he received the 2009 letter.

The solicitor unsuccessfully appealed to the High Court on a number of grounds, including the limitation point.  He then appealed to the Court of Appeal solely on the limitation issue.

Decision

The Court of Appeal (Lord Justices Bean, Nugee and Birss) held that Mr El Gamal's claim based on fraudulent misrepresentation was statute-barred.  However, it upheld his entitlement to an indemnity for breach of fiduciary duty and accordingly dismissed the appeal.

The court noted the following key principles from its review of the authorities:

• It is well established that the reference in section 32(1)(a) of the Act to actions "based upon the fraud of the defendant" does not mean any action where the defendant is alleged to have acted fraudulently, but only one where fraud is a necessary allegation to establish the cause of action (Beaman v ARTS Ltd [1949] 1 KB 550). Accordingly, in the present case, the provision could only apply to the claim based on fraudulent misrepresentations and not to the claims in contract and negligence in relation to the solicitor's retainer.
• Following the Supreme Court's decision in Test Claimants in the FII Group Litigation v HMRC [2020] UKSC 47 (as applied in the context of fraudulent misrepresentation in Gemalto Holding BV v Infineon Technologies AG [2022] EWCA Civ 782), the limitation period starts to run when the claimant has discovered enough to plead their case. The Supreme Court decision makes it clear that a claimant can know enough to plead a claim without knowing whether it will succeed.

Discovering the fraud as pleaded or as found by the court?

An initial question for the court was whether, in these circumstances, “the fraud” that had to have been discoverable by a claimant meant the fraud as formulated by it in its pleading (as the trial judge had held) or the fraud as found by the judge at trial.  The court heard no adverse argument on this question because the parties ultimately agreed that the relevant fraud was that found by the judge. However, it proceeded to consider the question as a point of general importance.

It noted that the issue of limitation is frequently raised before trial, as a preliminary question or in an application for summary judgment or strike out. In that scenario, the issue has to be assessed by reference to the pleaded case (ie. on an assumption that the case will be established) because at that stage no facts have been found. However, the court found nothing in the authorities that required it to confine its attention to the claimant's pleaded case once there had been a finding of facts.

The court observed that, while in most cases the fraud as found by the court will reflect the claimant's pleaded allegations, there could be cases where some allegations in the pleading were not pursued or were not established at trial, but the judge nevertheless found there to have been a fraud.  In such cases it would be wrong in principle, and a distraction, to ask when the claimant discovered the fraud alleged in the claims that went nowhere. The question is when the claimant could have discovered enough to plead the fraud found proved by the court.

Multiple lies

As to the fraud found in the present case, the Court of Appeal considered that the trial judge had, in effect, found that the solicitor had deceived Mr El Gamal by telling him two lies:

• that he would be the sole owner of the property (when in fact he would only have a 50% interest and hold the other half on trust for Mr Seedo); and

• that the £69,500 said to have been advanced by the solicitor would be a loan to Mr El Gamal (when in fact it belonged to Mr Seedo and was supposed to be held on trust by the solicitor to use as Mr Seedo's contribution to the purchase price).

In the court's view, it was clear that Mr El Gamal discovered the first lie in 2009 (more than six years before he brought his claim), when he received the letter asserting Mr Seedo's interest in the property. Even if he did not know enough to assess whether that assertion was well-founded, that would be enough to plead a claim for an indemnity, even if only on a contingent basis. However, the second lie was not discovered, and could not reasonably have been, until 2016 (which was less than six years before commencement).

That gave rise to the more substantive issue argued in the appeal: whether, where an action was based on two lies, the claim would be barred by limitation six years after the claimant discovered the first lie or six years after the second lie was discovered.

The court concluded that the answer depends on whether the second lie gives rise to a different cause of action to the first. Limitation periods operate by barring particular causes of action and that principle underlies the entire structure of the Act. It is a commonplace that different causes of action may have different time limits even if based on much the same set of facts.  A good illustration of that was AIC Ltd v ITS Testing Services (UK) Ltd [2006] EWCA Civ 1601, where the claimant knew of the defendant's breach of contract and/or duty more than six years before it brought a claim but the defendant's deceit in relation to those breaches constituted a separate cause of action and consequently that claim was not statute-barred.

Accordingly, if the second lie (regarding the source of the funds supplied by the solicitor) gave rise to a separate cause of action, Mr El Gamal would have six years from when he could reasonably have discovered that second lie even if his right of action on the first lie was statute-barred.

When will a second lie give rise to a separate cause of action?

The court then went on to consider how a judge should assess whether a second lie gave rise to a separate cause of action for these purposes. It noted that it had not been taken to any authority shedding light on the issue (including any of the jurisprudence as to whether adding new particulars to a claim amounts to pleading a new cause of action).  The court therefore addressed the question as a matter of principle.

In the court's view, the relevant question is whether the different misrepresentations could be considered as distinct and unconnected, or part of the same overall deceit.  By way of illustration in the context of a house purchase, an example of distinct lies would be that there were no ongoing disputes with the neighbours, and also that the house did not suffer from subsidence.  An example of related lies would be that the house did not suffer from subsidence, and also that the vendor has not made any insurance claim in that regard.  In that latter case, although the lies differed in their detail, they were designed to conceal the same thing from the purchaser, and the second lie did not give rise to a separate cause of action.

Applying those principles to the present case, the second lie did not give rise to a separate cause of action because it was part of a package of related lies all directed at persuading Mr El Gamal to complete the purchase on the false basis that he would be the sole owner. The lies were all designed to conceal the same thing, namely Mr Seedo's involvement in the purchase. Accordingly, the limitation period started to run when the first lie was revealed in 2009, with the result that Mr El Gamal's claim based on fraudulent misrepresentation was statute-barred. 

The claims under the retainer

Mr El Gamal's indemnity claims based on breach of contract and tortious duties were also statute barred, for the same reason that in 2009 Mr El Gamal discovered, or could reasonably have discovered, that the solicitor's advice was deficient.

However, Mr El Gamal was entitled to an indemnity for the solicitor's breach of his fiduciary duties by putting himself in a position of conflict with his client. That claim was not subject to the same limitation difficulties because nothing in the 2009 letter put Mr El Gamal on notice of the solicitor's personal interest in the transaction.