Professional negligence – Limitation – Cause of action – Respondent instructing appellant firm of solicitors in connection with property transaction – Appellant negligently failing to name guarantors as parties to underlease and advise respondent to insure premises – Respondent raising limitation defence – County court deciding as preliminary issue that claim in tort not time-barred – Appellant appealing – Whether claim statute-barred under Limitation Act 1980 – Appeal allowed
The appellant was a firm of solicitors retained by the respondent in connection with a transaction pursuant to which her husband was to grant her a lease, and she would grant an underlease to M, of premises in Stanley Road, Grays, Essex, of which her husband was the freehold owner. M’s parents were to guarantee his obligations under the underlease.
The lease included covenants by the respondent to insure the premises against fire and to keep them in good repair. The underlease also contained covenants to insure, while M covenanted to keep the property in repair as well as to pay the rent. By mistake, the appellant failed to name M’s parents as parties to the underlease as guarantors. Further, the appellant did not advise the respondent to obtain insurance and the appellant accepted that it had failed to exercise reasonable skill and care in drafting the documentation and advising the respondent. There was a fire at the premises which effectively destroyed the buildings. The respondent had no insurance and was left with no rent and her losses were uninsured.
The respondent brought proceedings against the appellant seeking damages for negligence, more than six years after the lease and underlease were executed but less than six years after the fire. The appellant argued that the claim was statute-barred. The county court decided, as preliminary issue, that the claim was not barred by virtue of the Limitation Act 1980: Prior to the fire any loss was purely contingent which, in the light of the decision in Law Society v Sephton & Co [2006] 2 AC 543, was not actionable damage such as to make good a cause of action in tort. The appellant appealed.
Held: The appeal was allowed.
(1) A claim in tort would normally become time-barred six years after the cause of action accrued. With the tort of negligence, damage was an essential ingredient of the cause of action. The availability of a limitation defence would thus depend on when the negligence first caused actionable damage. Once real damage, as distinct from purely minimal damage, was sustained the cause of action arose, even though greater loss might later eventuate from the negligence. The fact that the risk to which the claimant was exposed by the defendant’s negligence might not eventuate did not mean that the claimant did not suffer loss as a result of being exposed to that risk. It was the possibility of actual financial harm that constituted the loss: Bell v Peter Browne & Co [1990] 2 QB 495, Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172, Sephton, Shore v Sedgwick Financial Services Ltd [2009] Bus LR 42, Axa Insurance Ltd v Akther & Darby [2010] 1 WLR 1662 and Maharaj v Johnson [2015] UKPC 28 considered.
(2) A claimant could not defeat the statute of limitations by claiming only in respect of damage which occurred within the limitation period, if he had suffered actual damage from the same wrongful acts outside that period. Negligence claims against solicitors often related to transactions, on which the solicitors were instructed, which had turned out badly. In that context, a claimant might allege either that, but for the solicitors’ negligence, he would not have entered into the transaction at all (no transaction) or that, had it not been for the negligence, the transaction would have been a better one (a flawed transaction).
Where claimants had entered into bilateral transactions as a result of defendants’ negligence and liability was for the difference between what the claimant got and what he would have got if the defendant had done what he was supposed to have done, it might be relatively easy to infer that the claimant had suffered some immediate damage, simply because he did not get what he should have got. The fact that the transaction was flawed did not by itself mean that the claimant suffered actual damage on entry into it. There was no substitute for attending to the particular facts and deciding whether an inference that there was immediate damage was properly to be drawn from them.
(3) The present case was a “flawed transaction” case. The respondent would still have taken a lease of the premises and granted an underlease to M if there had been no negligence. However, if the appellant had not been negligent, M’s parents would have guaranteed his obligations and, it was to be assumed, the respondent would have been warned of the need to insure and would have done so. A contingent liability did not of itself constitute damage: there had to be something more. The court would consider whether the effect of the transaction was to place the claimant in an objectively less favourable position than if the solicitors had not been negligent.
On the face of it, the respondent’s lease must have been less valuable because there was no guarantor in respect of the underlease and, for good measure, it was not within her power to remedy the deficiency without the co-operation of M’s parents. While it would not have been possible to say how far, if at all, the respondent might have wished to call on a guarantee, there could be no doubt that, looked at objectively, what she received from the transaction was significantly inferior to what she should have received. The issue whether the respondent wanted to assign the lease was irrelevant; what mattered was whether the lease would have been more valuable if the rent had been guaranteed. The reversion to an underlease with the benefit of M’s parents as guarantors would have been of measurably greater value than that to the unguaranteed underlease which the appellant’s negligence led the respondent to grant.
Accordingly, the appellant’s failure to ensure that M’s parents were guarantors caused the respondent’s damage as soon as the lease and underlease were entered into. Her cause of action accrued at that point and was now statute-barred. The failure to give advice as to the need to insure did not fall to be treated any differently from the failure to ensure that M’s parents became guarantors.
Simon Goldstone (instructed by Reynolds Porter Chamberlain LLP) appeared for the appellant; Daniel Crowley (instructed by Clarkson Wright & Jakes Ltd, of Orpington) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Elliott v Hattens Solicitors (a firm)
