Negligent misstatement limitation period lecture

Update, 20 November 2008: The latest decision is Pegasus Management Holdings S.C.A. v Ernst & Young (a firm) [2008] EWHC 2720 (Ch).  A CMS Cameron McKenna Law Now note may be read here.

Original post: The Law Institute is putting on a lecture at lunchtime on 24 June 2008 by an ex-megafirms lawyer who has gone boutique, Margot Clarkson. It will be about the very specific topic of limitation periods for negligent misstatement cases (though somewhat oddly, the case featured in the flyer, Wardley v Western Australia (1992) 175 CLR 514 is a pure misleading and deceptive conduct case).  I treated that topic at some length in an article imaginatively titled ‘Legal Professional Liability Part II’ at (2001) 9 Torts Law Journal 1 (I have reproduced the relevant bit below), and have blogged about it from time to time since (see these posts).  It’s a difficult topic, and such a seminar is welcome. It costs $80 for LIV members and $160 for non-members.

This is what I said in the article:

4.6 Application of the law of limitation of actions

The maxim that equity follows the law assists defendants to professional negligence suits in relation to limitations questions where a breach of fiduciary duties is also alleged. It is necessary briefly to consider the relevant rules in contract, tort, and equity in relation to claims for pure economic loss. It seems to me that these rules are misunderstood by some practitioners, who are led into error by inappropriate analogies with cases involving latent damage to buildings, cases based on the Trade Practices Act 1974 (Cth), and the statutory exceptions in relation to personal injuries.85 Solicitors who institute proceedings which are out of time are more than usually likely to be on the wrong end of both a costs order against them personally, and a writ alleging professional negligence: the courts look particularly unfavourably on negligent handling of limitations issues.86

Section 5(1) of the Limitation of Actions Act 1958 (Vic) provides:

The following actions shall not be brought after the expiration of six years from the date on which the cause of action accrued: (a) Actions founded on simple contract (including contract implied by law) . . . or actions founded on tort.

The real question is when does the cause of action accrue? For it is from this time that the six years are counted unless there is fraud, or the action is based on the doctrine of mistake, or one of the other exceptions to the general principle applies.87

The policy of the law is “to advance, rather than retard the accrual of a cause of action”. And, “[t]his is especially so if the law provides parallel causes of action in contract and in tort in respect of the same conduct. The disparity between the time these parallel causes of action arise should be smaller, rather than greater.”88

4.6.1. Contract (breach of retainer)

The action for breach of contract accrues on the occurrence of the conduct which falls short of the implied contractual promise to act with due skill, care and diligence, even if no loss has been suffered by the innocent party as a result. The client is entitled to sue for breach of contract and recover nominal damages even where no loss has yet been suffered as a result of the conduct which was in breach of the implied term. In the absence of fraud,89 there is no difficulty in professional negligence cases of establishing the expiration of the limitation period applicable to the breach of retainer except in correctly identifying the conduct which constituted the breach.

4.6.2. Tort and the Trade Practices Act

The application of the rule for the same claim in negligence is conceptually more difficult, more prone to confusion with other specialised rules relating to other corners of the tort of negligence, and is also the subject of an apparent tension between two competing lines of authority. As will be seen, however, the tension is more apparent than real, and its ramifications are generally outside the sphere of professional negligence. By way of aside, the Trade Practices Act imposes a limitation period of three years on claims for misleading or deceptive conduct.90 The shorter limitation period seems to make judges strain against the apparent injustice of barring claims so early and there is a danger that the resultant decisions will infect the law of tort by reverse analogy. The wording and structure of the Trade Practices Act, which provides one limitation period for both damage which has already occurred and damage which is likely to occur, is another factor which distinguishes limitations cases decided under that Act from the breach of duty cases, but one which is neglected in judicial and academic analysis alike.91

The rule is that the tort of negligence accrues when some damage is first suffered by the innocent party as a result of the conduct which was in breach of the duty of care.92 It is not when the main damage “crystallises” or when some damage is first discovered. The law of negligence knows no remedy of nominal damages: damage is the gist of the cause of action. As restated recently by the House of Lords in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2), the position is this:

As every law student knows, causes of action for breach of contract and in tort arise at different times. In cases of breach of contract the cause of action arises at the date of the breach of contract. In cases of tort the cause of action arises, not when the culpable conduct occurs, but when the plaintiff first sustains damage. Thus the question which has to be addressed is what is meant by “damage” in the context of claims for loss which is purely financial (or economic as it is sometimes described).

. . .

Take first a simple case which gives rise to no difficulty. A purchaser buys a house which has been negligently overvalued or which is subject to a local land charge not noticed by the purchaser ’s solicitor. Had he known the true position the purchaser would not have bought. In such a case the purchaser ’s cause of action in tort accrues when he completes the purchase. He suffers actual damage by parting with his money and receiving in exchange property worth less than the price he paid. In the ordinary way the purchaser in this example will not know of the negligence of his valuer or solicitor when completing the purchase. Despite this his cause of action arises at the date of completion, and time begins to run for limitation purposes . . . a plaintiff could find his cause of action time-barred before he even knew he had reason to bring proceedings against anyone.93

This sounds harsh, but the High Court has recognised that a statute of limitations is a line in the sand, and the positioning of the line itself represents the outcome of the balancing exercise between the rights of plaintiffs to have their cases heard and the rights of defendants to certainty and to a fair trial. And the later the courts find causes of action accruing, the later plaintiffs must wait before having their rights vindicated before the courts, and the later most species of statutory interest begin to run. Deane J commented:

It is inevitable that a Statute of Limitations will, on occasion, lead to injustice in the special circumstances of particular cases. Such injustice, when it occurs, is an unavoidable cost of the benefits involved in ensuring that plaintiffs act promptly and that defendants are not subjected to the litigation of stale claims.95

There is no rule that causes of action for damages for negligently caused economic loss do not accrue until the damage is “reasonably discoverable”.96 The apparent tension in the law is between the predecessor to the Nykredit case in England, Forster v Outred,97 and the High Court’s decision in Wardley v Western Australia,98 where the majority stated:

When a plaintiff is induced by a misrepresentation to enter into an agreement which is, or proves to be, to his or her disadvantage, the plaintiff sustains the detriment in a general sense on entry into the agreement. That is because the agreement subjects the plaintiff to obligations and liabilities which exceed the value or worth of the rights and benefits which it confers on the plaintiff. But as will appear shortly, detriment in this general sense has not universally been equated with the legal concept of “loss or damage”. And that is just as well. In many instances the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact on events as they unfold becomes known or apparent and, by then, the relevant limitation period may have expired. To compel a plaintiff to institute proceedings before the existence of his or her loss is ascertained or ascertainable would be unjust. Moreover it would increase the possibility that the courts would be forced to estimate damages on the basis of likelihood or probability instead of assessing damages by reference to established events. In such a situation, there would be an ever-present risk of undercompensation or overcompensation, the risk of the former being the greater.99

The court was there concerned with a Trade Practices Act claim by the Western Australian government that it had been induced by misrepresentations made by “officers of Bond Corporation” and Laurie Connell, amongst others, into giving an indemnity (a guarantee essentially) in respect of a loan by the NAB to bail out the floundering merchant bank, Rothwells.

At first glance, the law expressed in the above quote appears inconsistent with the case of Forster v Outred.100 There, a woman was convinced by her son to mortgage her unencumbered residence as security for a transaction he proposed from which she did not stand to benefit. The security was called on, and the woman sued her solicitor who advised her in relation to the proposed mortgage. The Court of Appeal found that the value of the house was diminished on the registration of the mortgage on the previously unencumbered title, and the six-year limitation period commenced from that time, so that by the time the woman brought proceedings prompted by the lender ’s realisation of the security, they were out of time.

Criticism of the case ought to be directed, if at all, to the finding of fact that some loss was suffered on the registration of the mortgage on title. There is nothing wrong with the legal reasoning (which is consistent with the recent statement of the relevant principles in the House of Lords and the Supreme Court of Queensland referred to above),101 if one accepts the factual premise on which the reasoning is based. In fact, the majority of the High Court has acknowledged this in Wardley v Western Australia. They asserted that Forster v Outred was “explicable by reference to the immediate effect of the execution of the mortgage on the value of the plaintiff’s equity of redemption”,102 and Supreme Courts have on five separate occasions asserted by reference to the majority’s judgment in Wardley v Western Australia that the High Court affırmed the principle in Forster v Outred,103 in particular in a recent judgment of the Supreme Court of Victoria which thoroughly reviews the relevant authorities.104 The distinguishing factor in Wardley v Western Australia was that the Government lost nothing in giving the indemnity; its loss was purely contingent.

The situations where “the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact on events as they unfold becomes known or apparent” are confined to circumstances such as where one party is induced to purchase a business on the basis of representations as to the business’s future earning capacity. In that case, the unfolding of events is necessary to disprove the representation.105 But the introduction into such a transaction of a claim against a solicitor often means that clients must either plead that they entered into a transaction which they would not have entered into but for the negligent conduct of the solicitor, or plead that they lost a chance to do something differently. In each case, the damage is suffered at the time that the transaction was entered into or when the chance was lost, which is also most likely to have occurred at the time of the transaction.106

The cases where results do not sit neatly with this simple logic are not cases in which solicitors are sued, and are decisions on claims under the Trade Practices Act.107 Many of them involve the entry into guarantees or mortgages, a species of loss which is amenable to being characterised as contingent and not actual prior to the security being called on, in a way that claims against solicitors are not. The exceptions to these observations fall within the fraud and concealment exceptions to the general rule.108

By way of illustration:

  • Where a solicitor drafted an invalid rent review clause, the cause of action accrued on execution of the lease, not later when the landlord tried unsuccessfully to exercise his rights under the clause and discovered the deficiency.109
  • Where a solicitor drafted an invalid restraint of trade clause while acting for a partnership introducing a new partner, the original partners’ cause of action accrued when it admitted the new partner, not later when it was unable to restrain the new partner from setting up business in competition nearby, having resigned from the partnership.110
  • Where a solicitor drafted an invalid tenant’s option clause in a lease while acting for the purchaser of a business conducted at the leasedpremises, the tenant’s cause of action accrued on the purchase of the business, not later when its attempts to sell the business were stymied by the intending purchasers’ solicitors’ identification of the invalidity of the clause.111
  • Where a solicitor allowed a client’s claim to become statute-barred, the client’s claim against the solicitor for negligence accrued at the expiration of the limitation period, not later when the defendant actually pleaded the relevant defence.112
  • Where a solicitor negligently advised his client to execute a deed relating to spousal maintenance, thereby foregoing his rights to vary the agreed arrangements if his circumstances changed, the client’s cause of action accrued on entering into the deed, not later when his application for variation of the maintenance arrangements was met by the wife’s application to enforce the deed.113

Another case, involving a quantity surveyor rather than a solicitor, also illustrates well the principle that it is when loss is first suffered that the cause of action arises. In Byrne v Hall Pain & Foster (a firm),114 the plaintiffs alleged that but for the quantity surveyor ’s negligent report, they would not have bought the property, which turned out to be worth less than what they paid for it. The cause of action was held to arise on the exchange of contracts, not on settlement (with the somewhat unfortunate result for the plaintiffs, that they were a few days out of time and had their claim struck out).

4.6.3. Equity

Outside the context of strict trust law,115 the Victorian Limitation of Actions Act does not bar an equitable claim against a fiduciary. As has been reconfirmed recently in the Supreme Court of Victoria, however:

It is well established law that in certain circumstances an equitable claim may be barred by what is known as the doctrine of analogy. This operates to apply the statutory limitation period where the claim made in equity is analogous to a claim which is expressly provided for in the limitation statute.116

The principle represents the confluence of two of equity’s favourite Confucianisms: “Equity does not assist those who sleep on their rights”, and “Equity follows the law”.  The principle is codified in s 5(8) of the Limitation of Actions Act 1958 (Vic).

Gillard J observed in that Supreme Court case, which dealt with a strike-out application brought by defendant solicitors:

It is clear that the plaintiffs have brought their claim in equity because of the concern that a claim for damages, for breach of retainer at common law would be statute barred.117

There is no discussion to be found in the reports of the application of the rule to pleadings of breach of fiduciary duties against solicitors which are analogous to alternative claims in contract and/or tort for the simple reason that no such claim has ever been successful. A claim against a constructive trustee has been held to be sufficiently analogous to claims of the kind which are subject to the statute of limitations, however, and the situation must be a fortiori in relation to a dressed up negligence claim against a solicitor.118 Cases which are not governed by analogy, including justified pleadings of breach of fiduciary duties, are governed by the equitable doctrine of laches.119

85 See, for example, Harding v Winkler [2000] NSWSC 737 (NSW SC, Master Malpass, 28 July 2000, unreported, BC20004262).

86 Ignorance of a limitations statute may never be met by the rule that ignorance of a statute is negligent only if the statute is of common occurrence described in Stephens & Co v Allen (1921) 91 LJPC 32 (Privy Council); Central Trust Co v Rafuse [1986] 2 SCR 147; (1986) 31 DLR (4th) 481 and Summerville v Walsh (NSW CA, 26 February 1998, Mason P, Sheller and Beazley JJA, unreported, BC9800342).

87 The exceptions to the general principle are beyond the scope of this article as they apply equally in relation to all causes of action. The latest authorities on the exceptions are well summarised in Di Sante v Camando Nominees Pty Ltd [2000] VSC 211 (Warren J, 25 May 2000, unreported, BC200003166).

88 Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2) [1998] 1 All ER 305 at 311; [1997] 1 WLR 1627 at 1633 per Lord Nicholls.

89 In Safetycare Australia Pty Ltd v Maxwell [1999] VSC 535 (14 December 1999, unreported, BC9908825) at [77], Gillard J observed, in the context of an analysis of a limitations point, that “fraud unravels all”, citing London General Omnibus v Holloway [1912] 2 KB 72 at 81.

90 The Trade Practices Amendment Bill (No 1) 2000 (Cth) will, if passed as seems likely, increase the period to six years, semi-retrospectively.

91 Deane J drew support from the words of the legislation in Wardley v Western Australia (1992) 175 CLR 514; 109 ALR 247, as described in the following passage: “the context provided by the fact that an action under s 82(1) is to recover ‘the amount of the loss or damage’ and by other provisions of the Act lends some support for the conclusion that loss or damage has not been suffered for the purposes of s 82 at a stage where all that is involved is an isolated contingent liability to make a future payment in the event that some possible or even likely, but none the less uncertain, future state of affairs comes about. In particular, s 87 of the Act expressly distinguishes between the actual suffering of loss or damage and the likelihood (or contingency) that loss and damage will be suffered in the future. In terms, it empowers ‘the court’, in respect of persons ‘likely to suffer ’ loss or damage by conduct in contravention of Pt IV or Pt V, to make appropriate orders which will ‘prevent or reduce’ (emphasis added) actual loss or damage. Note also, that the obscurely worded provision of s 87(1CA)(b) arguably assumes that an independent cause of action arises under s 87(1A) for an order which ‘will prevent’ loss or damage which would otherwise be ‘likely to be suffered. See, eg, Magman International Pty Ltd v Westpac Banking Corp (1991) 104 ALR at 592.”

92 Good examples of this proposition are to be found in the outcomes of the following cases: Doundoulakis v Antony Sdrinis & Co [1989] VR 781; Wilson v Rigg [2000] NSWSC 16 (Sperling J, 7 February 2000, unreported, BC200000230); Di Sante v Camando Nominees Pty Ltd [2000] VSC 211 (Warren J, 25 May 2000, unreported, BC200003166); Byrne v Hall Pain & Foster (a firm) [1999] 2 All ER 400 (CA); and Scarcella v Lettice [2000] NSWCA 289 (Handley, Powell and Giles JJA, 1 November 2000, unreported, BC200006725).

93 [1998] 1 All ER 305 at 308; [1997] 1 WLR 1627 at 1630. The decision has been followed in Australia: Piesse Investments Pty Ltd v WR Mortgagee Ser116 (Qld SC).

94 Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2) [1998] 1 All ER 305; [1997] 1 WLR 1627, was a case where the plaintiff was trying to characterise the cause of action as having accrued earlier in order to assert entitlement to greater interest.

95 Hawkins v Clayton (1988) 164 CLR 539 at 589-90; 78 ALR 69. Mason and Wilson JJ agreed. Brennan J made a similar comment at CLR 561.

96 Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 489-94; Hawkins v Clayton (1988) 164 CLR 539 at 588 per Deane J; 78 ALR 69; Wardley v Western Australia (1992) 175 CLR 514 at 540; (1992) 109 ALR 247; Di Sante v Camando Nominees Pty Ltd [2000] VSC 211 (Warren J, 25 May 2000, unreported, BC200003166) at [35]. Compare the situation in Canada: Central Trust Co v Rafuse [1986] 2 SCR 147; (1986) 31 DLR (4th) 481.

97 [1982] 1 WLR 86; [1982] 2 All ER 753, a judgment delivered on 11 March 1981. See also the recent case of Maronis Holdings Ltd v Nippon Credit Australia Ltd (2000) 175 ALR 36.

98 (1992) 175 CLR 514; 109 ALR 247.

99 Ibid, at CLR 527; ALR 254.

100 [1982] 2 All ER 753.

101 See above n 95.

102 (1992) 175 CLR 514 at 528; 109 ALR 247 at 256.

103 Hill v Grand United Friendly Society (NSW SC, Windeyer J, 28 November 1996, unreported, BC9605666); Daly v Commonwealth Development Bank (NSW SC, Windeyer J, 10 October 1997, unreported, BC9705099); Di Sante v Camando Monimees Pty Ltd [2000] VSC 211 (Warren J, 25 May 2000, unreported, BC200003166) and Maronis Holdings Ltd v Nippon Credit Australia Ltd (2000) 175 ALR 36 at [24]. The harmony of the English and Australian lines of authority was re-emphasised in Piesse Investments Pty Ltd v WR Mortgagee Services Pty Ltd (1998) 41 IPR 116 (Qld SC), where it was asserted that the late-1997 decision of the House of Lords in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2) [1998] 1 All ER 305; [1997] 1 WLR 1627, was not inconsistent with the High Court’s decision in Wardley v Western Australia.

104 Di Sante v Camando Nominees Pty Ltd [2000] VSC 211 (Warren J, 25 May 2000, unreported, BC200003166) at [36]ff.

105 See Karedis Enterprises Pty Ltd v Antoniou (1995) 59 FCR 35; 137 ALR 544.

106 Costa v Georghiou [1984] NLJR 82 (CA); DW Moore v Ferrier [1988] 1 All ER 400; [1988] 1 WLR 267 (CA); Gillespie v Elliott [1987] 2 Qd R 509 (FC) at 513-19, 520-1; Doundoulakis v Antony Sdrinis & Co [1989] VR 781 (FC) at 785-7; Christopoulos v Angelos (1996) 41 NSWLR 700 (CA); Vining v Marsden (NSW SC, Cohen J, 25 November 1996, unreported, BC9605607); Hill v Grand United Friendly Society (NSW SC, Windeyer J, 28 November 1996, unreported, BC9605666); Daly v Commonwealth Development Bank (NSW SC, Windeyer J, 10 October 1997, unreported, BC9705099); Piesse Investments Pty Ltd v WR Mortgagee Services Pty Ltd (1998) 41 IPR 116 (Qld SC); Wilson v Rigg [2000] NSWSC 16 (Sperling J, 7 February 2000, unreported, BC200000230); Hillebrand v Penrith Council [2000] NSWSC 1058 (Austin J, 14 November 2000, unreported, BC20007069).

107 Magman International v Westpac Banking Corp (1991) 32 FCR 1; 104 ALR 575; Karedis Enterprises Pty Ltd v Antoniou (1995) 59 FCR 35 at 40-3; 137 ALR 544 at 552-4; Wood v Wood (1997) 149 ALR 301 at 306-7; Gilbert v Shanahan [1998] ANZ Conv R 21 [Ext]. The recent decision of the High Court in Kenny & Good Pty Ltd v MGICA (No 2) Ltd (1999) 199 CLR 413; 163 ALR 611 involved a limitations question only in respect of the Trade Practices Act claim, as a reading of the first instance judgment shows: see MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 140 ALR 313 immediately under heading 7.5, per Lindgren J. See the comments of Bryson J in Maronis Holdings Ltd v Nippon Credit Australia Ltd (2000) 175 ALR 36 at [24]-[28].

108 For example, Hawkins v Clayton (1988) 164 CLR 539; 78 ALR 69. See s 27 of the Limitation of Actions Act 1958 (Vic).

109 Costa v Georghiou [1984] NLJR 82 (CA).

110 DW Moore v Ferrier, Ferrier [1988] 1 All ER 400 (CA); [1988] 1 WLR 267.

111 Gillespie v Elliott [1987] 2 Qd R 509 (FC).

112 Doundoulakis v Antony Sdrinis & Co [1989] VR 781. See also Wilson v Rigg [2000] NSWSC 16 (Sperling J, 7 February 2000, unreported, BC200000230). As to the calculation of damages for the loss of the chance to bring the proceeding which became statute barred, see Crump v Sharah [1999] NSWSC 884 (Davies AJ, 2 September 1999, unreported, BC9906246).

113 Vining v Marsden (NSW SC, Cohen J, 25 November 1996, unreported, BC9605607).

114 [1999] 2 All ER 400.

115 See ss 21 and 5(2).

116 Safetycare Pty Ltd v Maxwell [1999] VSC 535 (Gillard J, 14 December 1999, unreported, BC9908825) at [65].

117 Ibid, at [64].

118 See Dixon J in Cohen v Cohen (1929) 42 CLR 91 at 99, and Soar v Ashwell [1893] 2 QB 390, considered by Gillard J in Safetycare Pty Ltd v Maxwell [1999] VSC 535 (14 December 1999, unreported, BC9908825) at [67], [69]-[71], respectively.

119 See, for example, Coulthard v Disco Mix Club Ltd [1999] 2 All ER 457; Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (1999) 96 FCR 217; 169 ALR 419.

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