Professional negligence – Court of Appeal rules on limitation and the timing of loss

The Court of Appeal in Pegasus Management Holdings SCA & Anr v Ernst & Young & Anr [2010] EWCA Civ 181 has ruled that the limitation period for a claim for breach of duty against a professional adviser will run from the moment that damage has been suffered. In identifying when that moment has occurred, the court is ready to infer from the non-delivery by an adviser of what a client ought to have received that the relevant damage has been suffered, even if it is very difficult to quantify that damage at that stage. The effect of this was to render various alleged claims against Ernst & Young time-barred.

Facts

The case concerned claims for damages for professional negligence against Ernst & Young (E&Y) in connection with an alleged failure to give the claimants proper tax planning advice. The second claimant (B) (a wealthy individual) had sought advice from E&Y in order to mitigate or defer a large potential tax liability on a disposal of loan notes. To achieve this, B was advised that he could achieve roll-over relief by investing the proceeds of the disposal in a qualifying business satisfying various conditions. The first claimant (P), which was wholly owned by B, was subsequently incorporated to make these investments. However, it was alleged that E&Y’s advice in relation to the incorporation of this business was flawed and led to adverse tax consequences.

The claims, brought in contract and tort, related to advice given by E&Y over the period 1997-2003. However the claims were only issued on 10 November 2005. It was therefore accepted by the claimants that any claims based on breach of contract by E&Y committed before 10 November 1999 (six years before the claim form) were time-barred. Whether the same applied to the claimants’ claims in tort depended on whether the claimants had suffered actual damage before 10 November 1999.

This question was considered as a preliminary issue at first instance. Lewison J held that the claimants had suffered actual damage prior to 10 November 1999 and that their claims in tort in respect of advice given prior to this date were time-barred. The judge also granted a summary judgment application brought by E&Y in respect of P only, holding that P had no real prospect of showing at trial either that it had any contract with E&Y, or that E&Y owed it a duty in tort. The claimants appealed against both orders.

Decision

The appeals were dismissed. As regards the preliminary issue, the essence of the claimants’ argument was that, as a matter of fact, the adverse consequences of the structuring did not occur until after 10 November 1999. The limitation period, it was argued, did not start to run until these consequences were actually suffered.

The Court of Appeal rejected this argument. The alleged flaw in E&Y’s advice was that they did not advise that a more elaborate corporate structure was required in order to eliminate any risk of adverse tax consequences. B was disadvantaged regardless of the fact that the value of his shares in P remained the same upon completion of the transaction. Damage was suffered because the alleged flaw in E&Y’s advice immediately reduced B’s flexibility. B was not in fact doomed to suffer the adverse tax consequences. However, the effect of the advice was that the risk of such consequences remained, instead of having been eliminated. B’s future options had been inhibited and he was therefore in a materially worse commercial position as a result of the advice.

In the circumstances, the Court held that damage had been suffered as soon as the alleged defect in E&Y’s advice became incapable of cure (on 6 April 1998, the deadline to take advantage of the relevant tax deferral mechanism). The Court accepted that, if carried out at an early stage, the quantification of the defendants’ loss would have been very difficult. However, the overriding principle was that such difficulties would not have prevented the Court from making an assessment as to the damage that had been suffered. The judgment at first instance was therefore correct and the claims in tort were time-barred insofar as they related to advice given after 10 December 1999.

In relation to the summary judgment application, the Court again upheld Lewison J. There was no factual basis for any finding of any responsibility by E&Y towards P. Unlike between E&Y and B, no retainer was entered into with P, there was no contact between E&Y and P, and there was no need for advice to be given to P on the relevant matters, such advice being exclusively a matter for its sole shareholder, B.

Comment

This case provides a warning that the meaning of “actual damage” is perhaps not as straightforward as it might at first sight appear. Failing accurately to identify the point at which such damage has occurred – and therefore the point at which the limitation period in tort claims has begun running – can have serious consequences.

On one view, it might be regarded as unsatisfactory that the courts are prepared to deem damage to have occurred at a point when quantifying that damage is extremely difficult. However, a client which expects (or is entitled to expect) that a transaction on which it has received advice will include a particular, and material, feature will likely regard a failure to deliver that feature to be a material failure on the part of the professional. The willingness of the courts to regard such a failure as constituting damage to the client is perhaps therefore understandable.

This case is the latest in a series of cases in which claimants have failed to persuade the courts that the House of Lords decision in Law Society v Sephton [2006] UKHL 22 represents any real relaxing of the limitation rules in professional liability claims. In Sephton, a failure by accountants to identify fraud in a law firm on which it was reporting to the Law Society was held to give rise to a contingent liability which did not start time running for limitation purposes. Rather than heralding a new sympathy on the part of the courts for potential professional negligence claimants, however, it now seems that the decision in Sephton was specific to its facts and does not represent any wider doctrine. Perhaps the more important principle from Sephton was Lord Hoffman’s statement (noted by the Court in Pegasus) that it will often be relatively easy to infer that actual damage has been suffered in cases such as these.

It had been expected that the draft Civil Law Reform Bill would include reform of the law on limitation. This would have offered an opportunity to simplify and clarify the law in this area. However, in late 2009, it was announced that the proposed limitation reforms had been dropped from the Bill.

The final point to note from Pegasus, the finding that E&Y owed no duty of care to P, serves as a reminder that a written retainer can be as valuable to the client as to the professional.