Privy Council decision on limitation in professional negligence cases

A recent Privy Council decision has considered the point at which damage is suffered where a claimant has entered into a flawed transaction as a result of a defendant's professional negligence. This is a controversial issue of particular relevance where claims are brought long after the negligent acts were committed. The court's conclusion will often be, as it was in this case, that measurable damage was suffered as soon as the flawed transaction was entered into, and therefore time begins to run at that point for limitation purposes. However, the Privy Council disagreed with observations of the Court of Appeal in previous cases which suggested that damage would always be suffered at that point. Each case will depend on its facts – in particular whether at that point the claimant was measurably worse off than if the transaction had not been flawed: Maharaj & Anor v Johnson & Ors (Trinidad and Tobago) [2015] UKPC 28.

Where a claimant can establish that, had it not been for the defendant's negligence, it would not have entered into the transaction at all (a so-called "no transaction" case, as distinguished from a "flawed transaction" case), the starting point is different. In those circumstances, the question is when the transaction caused the claimant's financial position to be measurably worse than if he had not entered into it – which may often be a later date, though again it will all depend on the facts.

Under English law there is an extension to the basic six-year limitation period for negligence claims where a claimant lacks relevant knowledge about the claim at the time the cause of action accrues. However, that is subject to an overall longstop of 15 years. It therefore does not assist where the cause of action accrued more than 15 years before proceedings were issued. Hattie Middleditch, an associate in our insurance and reinsurance disputes team, considers the Maharaj v Johnson decision further below.

Background

The defendant solicitors acted for the claimants in the purchase of land in Trinidad and Tobago in 1986. The deed of conveyance was executed on behalf of the seller pursuant to a power of attorney.

In February 2008 the claimants entered into a contract for the sale of the land. It then emerged that there was some doubt as to the claimants' title, due to potential issues with the power of attorney. Although the original seller was located and agreed to enter into a deed of rectification, by that time the third party purchaser had backed out of the deal.

In February 2012 the claimants issued a claim in which they alleged that the defendants were negligent in failing to procure good marketable title to the land in 1986. They claimed the difference between the sale price ($20 million) and the current value (said to be around $4 million).

The claim was struck out in the High Court of Trinidad and Tobago on the grounds that it was time-barred (the relevant limitation period being four years from the date the cause of action accrued) and an appeal against that decision was subsequently dismissed.

The claimants appealed to the Privy Council on the grounds that:

• the cause of action in negligence had not arisen until February 2008, when the sale contract fell through; or alternatively
• the claimants should be permitted to amend their case to include a claim in contract, specifically that the defendants had a continuing contractual duty to them and remained in breach of that duty until April 2008 when the deed of rectification was entered into.

(For the purposes of the appeal, the Privy Council assumed that the defendants were in breach of duty, although this was denied by the defendants.)

Decision

The Privy Council dismissed the appeal on both grounds.

The claim in tort

A cause of action in tort accrues on the date on which the damage is suffered as a result of the breach of duty.

The Privy Council examined the difference between "no transaction" cases and "flawed transaction" cases, a distinction drawn on previously in the Court of Appeal cases of Pegasus Management Holdings SCA v Ernst and Young [2010] EWCA Civ 181  (see our post on that decision) and Axa Insurance Ltd v Akther and Darby [2009] EWCA Civ 1166:

• In a "no transaction" case, absent the defendant's breach, the claimant would not have entered into a transaction at all.
• In a "flawed transaction" case, absent the defendant's breach, the claimant would have entered into an analogous but flawless transaction.

These two types of case give rise to different inquiries for the purposes of determining when damage has occurred. In a "no transaction" case the question is: at what point did the transaction the claimant entered into cause his financial position to be measurably worse than if he had not entered into it? In a "flawed transaction" case the question is: was the value to the claimant of the flawed transaction measurably less than the value of the flawless transaction would have been?

The Privy Council held that the present case was an example of a "flawed transaction". The claimants' had contended that it was a "no transaction" case because the defendants had a duty to warn them that the deed of conveyance would fail to convey to them the legal title in the land, and if the defendants had done so the claimants would not have proceeded with the purchase. The Privy Council rejected this contention as unrealistic. The defendants' duty was to take all reasonable care to ensure the legal title was passed. In the absence of the defendants' alleged breach of that duty, the claimants would have entered into an analogous transaction in which marketable title to the land was conveyed to them.

The Privy Council said that the fact a transaction is flawed does not by itself mean that a claimant suffers actual damage on entry into it. It disagreed with observations in at least two previous decisions of the Court of Appeal (including Pegasus, referred to above) which suggested that professional defendants who have breached their duty of care will always be able to establish that the claimant suffered actual damage at that point, saying those observations went too far. The question of when actual damage is suffered will always depend on the facts of the case.

In this case, however the claimants had suffered actual damage in 1986 when they purchased the land. At that point, they were subjected to significant risks which were present from then onwards. Any attempts to sell the land or borrow on its security would be likely to have met with similar obstruction to the situation they faced in 2008, which shows that the interest they obtained in the land was less valuable than a full legal title. And they were not able to remedy the situation without the cooperation of the original seller.

Accordingly, the claim in tort was time-barred.

The proposed claim in contract

To have a contract claim that was not time-barred, the claimants needed a cause of action arising on or after 27 February 2008. To achieve this, the claimants needed to show a continuing contractual duty which the defendants continued to breach thus generating a fresh cause of action.

The claimants relied heavily on the decision of Oliver J in Midland Bank Trust Co Ltd v Hett Stubbs and Kemp [1979] 1 Ch 384. In that case solicitors had omitted to register an agreement as an estate contract within the relevant time (six years). Oliver J held that the solicitors were under a continuing contractual duty to register the option until the expiry of the six year period when the terms of conveyance made registration of an estate option impossible.

The Privy Council noted that the authority of Midland Bank had been substantially weakened by the decision of the Court of Appeal in Bell v Peter Browne and Co [1990] 2 QB 495, in which the court held that there was a single breach of duty in circumstances where solicitors failed to protect their client's interests in a property by procuring a declaration of trust and a mortgage in his favour.

Whether or not Midland Bank was wrongly decided (as one of the judges in Bell appears to have concluded) the majority of the Privy Council (Lord Clarke dissenting) said it could be distinguished on the grounds that it was a case of simple non-feasance (i.e. where a party has failed to something which was required of it). By contrast, the present complaint was that the action by which the defendants had purportedly performed their contract was negligently wrong. It was at the point when the claimants paid the purchase price that they did not receive marketable title which they had been contracted to receive. There was no reference in the contract, either express or implied, to any future contractual obligation (such as to procure a deed of rectification). Moreover, the defendants could not have procured execution of a deed of rectification without the participation of the third party seller. The majority held therefore that the proposed claim in contract was "factitious".