Extending the limitation period: House of Lords reins in claimants

A recent House of Lords judgment, Haward v Fawcetts (a firm) [2006] UKHL 9, has set out the basic principles for extending the limitation period in negligence actions where the claimant lacked knowledge of the relevant facts at the time the cause of action accrued (under section 14A of the Limitation Act 1980).

The five Law Lords agreed that to set time running for limitation purposes the claimant must know, in general terms, those facts which constitute the "essence" of the claim of negligence. Their Lordships unanimously held that in this case there was no basis on which to extend the normal six year limitation period against the defendant accountants. They reversed the Court of Appeal's judgment which had broadened the scope for claimants seeking to extend the limitation period under section 14A.

However, whilst there was unanimity as to both the basic underlying principle to be applied and the end result, the opinions delivered by their Lordships contained significant differences of reasoning. Indeed they were not even in agreement as to when, on the facts of this case, time started to run against the claimant.

Background

Under section 14A of the Limitation Act 1980, the basic six year limitation period for actions in negligence can be extended if, at the time the cause of action accrued, the claimant lacked knowledge of either:

1. the material facts about the damage for which he is claiming (i.e. in cases of latent damage); or
2. other facts relevant to the action, including that the damage was attributable in whole or in part to the act or omission which is alleged to constitute negligence.

It is knowledge of facts that matters. It is irrelevant whether the claimant also knew that, as a matter of law, the act or omission in question involved negligence.

Where this section applies, the limitation period can be extended to three years from the date the claimant first acquired knowledge of the relevant facts. The burden of proof is on the claimant to establish that it first acquired such knowledge no more than three years before the action was commenced.

Facts

In this case the claimant, Mr Haward, had invested various sums in a trading company from December 1994 onwards, allegedly as a result of negligent advice from the defendant accountants, Fawcetts. The company ultimately failed and the investments were lost.

Mr Haward commenced proceedings against Fawcetts on 6th December 2001. Fawcetts contended that any claims relating to investments prior to 6th December 1995 were statute-barred. Mr Haward sought to rely on section 14A to extend the limitation period. Accordingly, he had to establish that he did not have knowledge of the relevant facts until after 6th December 1998 (three years before proceedings were issued).

Lower court judgments

At first instance, the judge held that Mr Haward knew all the material facts as they occurred. He knew that sums had been invested on the advice of the defendant and that those investments had been lost. In the judge's view the causal connection between the advice and the damage was "patent and obvious". The only thing that Mr Haward did not know by 6th December 1998 was that the advice was (allegedly) negligent, but that is irrelevant for the purposes of section 14A.

The Court of Appeal reversed the judge's decision on the basis that the act or omission of which the claimant must have knowledge for the purposes of section 14A is that which is "causally relevant" for the purposes of the allegation of negligence. Since there were a number of competing causes for the failure of the investments apart from Fawcetts' advice, Mr Haward did not acquire the requisite knowledge until May 1999 (which is when an investigation was in fact commenced into the causal link between Fawcetts' advice and the claimant's losses).

House of Lords decision

The House of Lords unanimously allowed the defendant's appeal, finding that the claimant had not discharged his burden of proof in establishing that he lacked the requisite knowledge before 6th December 1998.

Their Lordships held (approving the Court of Appeal judgment in Hallam-Eames v Merrett Syndicates (1995) [2001] Lloyd's Rep PN 178) that the act or omission of which the claimant must have knowledge is that which is causally relevant for the purposes of an allegation of negligence. In other words, the claimant must know the substance or essence of the act or omission on which the claim is ultimately based.

To this extent their Lordships agreed with the Court of Appeal. However, they disagreed with the Court of Appeal's conclusion that the claimant could not have had the requisite knowledge while there were various competing causes of the loss. Knowledge for the purposes of section 14A does not need to be certain knowledge; what is required is knowledge that there is a real possibility that the loss was caused by the act or omission in question, such as to make it reasonable to embark on preliminary investigations into a potential claim.

Whilst the Law Lords were in agreement that what is required is knowledge of the essence of the act or omission constituting negligence, the task of identifying that "essence" on the facts of this case proved much more controversial.

For Lord Nicholls and Lord Mance the conduct alleged to constitute negligence could not be the mere giving of advice; this would be to ignore the need to identify the causally relevant act or omission. The claimant had to know, in general terms, that something had gone wrong which gave him prima facie cause to complain. On the facts of this case, they considered the essence of the negligent conduct to be "the giving of flawed advice", or the fact that "the transaction was from the outset intrinsically unsound" giving the claimant "prima facie cause to complain". It followed that time did not begin to run against Mr Haward until he knew enough for it to be reasonable to embark on preliminary investigations into the advice given. Mr Haward had failed to establish that this date was after 6th December 1998.

In contrast, Lord Scott and Lord Brown effectively agreed with the judge's view that the only knowledge required of the claimant was that he had made investments in reliance on the defendant's advice and had suffered loss on those investments. The essence of the conduct in question was, on this view, simply the giving of advice. Both Law Lords clearly considered that a decision extending the limitation period in the circumstances of this case would set a dangerous precedent.

The basis for Lord Walker's conclusion is less obvious. He (somewhat hesitantly) approved the test set out in Hallam-Eames v Merrett Syndicates, rejecting Fawcetts' submission that the court should adopt what he described as a "more starkly reductionist view" of the requisite knowledge. It is not entirely clear, however, whether he considered the "essence" of the negligent conduct in this case to be simply the advice Fawcetts had (or had not) given, or the fact that the advice was somehow faulty.

Whilst their Lordships were unanimous in allowing the defendant's appeal in this case, the opinions delivered by their Lordships show that the logic underlying this result is far from uniform. This significant variation in reasoning illustrates the thin tightrope that must be walked for the purposes of section 14A between: (i) knowledge of the causally relevant facts, which is the knowledge required to start time running, and (ii) knowledge that those facts involved negligence, which is irrelevant for limitation purposes.

Given the differences between the opinions delivered by the five Law Lords, the judgment will be of limited assistance in predicting the approach of the courts in future cases where the claimant seeks to rely on section 14A to extend the limitation period.