A tale of loss, limitation and a flawed transaction: why a loss may not feel like a loss

A recent Court of Appeal decision, Elliott v Hattens [2021] Civ 720, has once again raised the vexed issue of when the limitation period starts to run in a flawed transaction case. Does it start running immediately or at some later date?

Transactions are meat and drink to solicitors.  Whether they be house purchases, share sales or  commercial agreements, this is what solicitors do.  A flawed transaction is one which contains within it an error.  Perhaps the house purchase is subject to a third party right, or the share sale is at risk of challenge from a liquidator or the commercial agreement neglects to include a vital clause. 

Essentially, a flawed transaction occurs when the solicitor has failed to carry out the transaction as requested or has otherwise been negligent.

If the client wants to sue its solicitor for this flawed transaction, it must do so within the limitation period.  The contractual limitation period will run from the date of breach, which will (at the latest) be the date of completion.  That is not controversial.  However, the limitation period in tort is more debateable.  It runs from the date of loss or damage, but when is that?  Is this also the date of completion?  Or is it some later date? 

Traditional position

In Forster v Outred & Co [1982] 1 WLR 86, a mother charged her property to secure a loan for her sons' business. The business failed and the mother was required to pay £70,000. The question was, did the mother suffer loss when she charged her property or when she was required to pay the £70,000? 

The Court of Appeal ruled that loss was suffered on the date of the charge. The rationale was that, as soon as the property was charged, the property was worth less.  This loss by itself was sufficient to start the limitation clock running and it was irrelevant that there was a later loss when the son defaulted.   

In the years following Forster, various cases involving flawed transactions came and went. Bell v Peter Browne & Co. [1990] 2 QB 495 and Knapp v. Ecclesiastical Insurance Group plc [1998] PNLR 172 are two of the better known. But the ruling in Forster was adhered to by the courts.

It seemed incontrovertible.  The date of loss was the date of the flawed transaction. 

Sephton

Then, in 2006, the House of Lords handed down its judgment in Law Society v Sephton & Co [2006] UKHL 22, and the phrase 'pure contingent liability' forever entered the lexicon of limitation. 

Sephton & Co was a firm of accountants who audited the books of a solicitor, but failed to detect that the solicitor had been stealing money from client account between 1989 and 1995.  This led claims to be brought against the Solicitors' Compensation Fund, and in turn caused the Law Society to try to recover its losses from Sephton.

The Law Society issued proceedings on 16 May 2002.  As such, if loss or damage had been suffered by the Law Society prior to 16 May 1996, the proceedings were outside the limitation period.

Sephton argued that the damage had occurred long before May 1996.  It said that loss had occurred whenever the solicitor had stolen money as a consequence of Sephton's alleged negligent audit.  The last such theft was in 1995 and therefore, so Sephton argued, the claim had been issued out of time.

However, the House of Lords disagreed.  It held that the Law Society would only suffer loss if a claim was made on the compensation fund.  Until that point, it was possible that the claim would be resolved without the need to call upon the compensation fund.  In other words, the Law Society's liability was a pure contingent liability.

In the words of Lord Hoffman: "A contingent liability is not, as such, damage until the contingency occurs."    

Attempts to rely upon Sephton

Unsurprisingly, the ruling in Sephton was quickly seized upon by claimants in limitation difficulties.  Suddenly, every liability was argued to be a contingent liability. 

Shore v Sedgwick Financial Services [2008] EWCA Civ 863 was the first to test the court's attitude towards Sephton. It involved negligent financial advice in relation to a transfer of pension benefits from one scheme to another. The court held that this was not a contingent liability.  The flawed transaction resulted in Mr Shore obtaining a bundle of rights that was less valuable than he was entitled to. Mr Shore had therefore suffered loss at the time of the transaction.  This was a Forster v Outred case, rather than a Sephton case.  

Similarly, in Nouri v Marrvi [2010] EWCA Civ 1107, a case of solicitor's negligence regarding a property transaction, the court held that the loss occurred when the flawed transaction was completed, not when the property was registered. The loss was not purely contingent. The claimant had suffered loss from completion of the transaction and it was not contingent on registration of the property.  

Other cases such as Maharaj v Johnson [2015] UKPC 28, Russell v Cornwell [2014] EWHC 1509 (QB) and Holt v Holley & Steer Solicitors [2020] EWCA Civ 851 all reached the same conclusion.  They all involved flawed transactions, where the Claimant had suffered immediate loss.     

Elliott v Hattens

The most recent case where Sephton has been unsuccessfully argued was Elliott v Hattens Solicitors, [2021] Civ 720, in which RPC acted for the Defendant. 

The facts were simple.  Hattens, a firm of solicitors, advised Ms Elliott on an underlease of a property.  It was alleged that Hattens made two mistakes: (a) failing to get a guarantee in place and (b) failing to tell Ms Elliott that it was her responsibility to insure the premises. 

Here are the key dates:

• On 24 February 2012, the underlease was executed. 
• On 6 November 2012, the property burned down.  For want of either guarantee or insurance, the loss fell to Ms Elliott.
• On 10 April 2018, proceedings were issued against Hattens. 

Hattens immediately argued that the claim was out of time. 

The issue in front of the Court of Appeal was this.  If Ms Elliott's loss was suffered on the date of the fire, the proceedings would be within the limitation period.  If the loss occurred on the date of the underlease, they would not.

Naturally, Ms Elliott argued that the loss occurred on the date of the fire.  In so doing, she relied on Law Society v Sephton, arguing that her loss was a contingent loss.  If the fire had never happened, she would never have suffered the loss.  Surely that is the very definition of a contingent loss.

Well, yes, but no. 

The point in Sephton was that the Law Society had suffered no loss at all until the contingency was triggered.  None whatsoever.  Not even a penny of damage.  In contrast, Ms Elliott did suffer a loss immediately on execution of the underlease on 24 February 2012.  She had not received what she was entitled to.  Her bundle of rights was less than she wanted.  Because of the lack of insurance, she was in breach of her own lease and it was vulnerable to forfeiture. 

Of course, her loss became much larger after the fire, but she had already suffered a loss before the fire. And there was nothing contingent about that loss. It occurred the moment the flawed transaction was completed. The limitation clock had started on 24 February 2012 and Ms Elliott's' claim was time barred.

Conclusion

The decisions of Forster v Outred and Sephton are entirely consistent with each other.  Both seek to answer the question: when was damage first incurred?  The answer to that question will always depend upon the facts.

Where a client asks the solicitor to complete a transaction, the damage will almost invariably occur on completion.  On that date, the client will receive something lesser, something broken, something that is tangibly less valuable.  Of course, that flawed transaction may not create a serious problem for many months or years, but that is not the point.  In Elliott v Hattens, the lack of a guarantor did not become particularly relevant until the property burned down.  Nonetheless, the lack of a guarantor did create an immediate loss, because it rendered the lease less valuable.

This contrasts with Sephton, where the Law Society did not suffer any form of loss or damage until a claim was made on the compensation fund.  The Law Society was not Sephton's client.  Sephton's audit would have caused an immediate loss for its client, the solicitor's practice, but it not create a loss for the Law Society.  The Law Society did not receive a lesser bundle of rights, nor did it have something less valuable.  The Law Society's position was completely unaffected until a claim was made.  This is what is meant by 'pure contingent liability'.