The In-House Lawyer

The Limitation Act 1980 (the 1980 Act) and certain specific statutes set out the law in respect of the defence of limitation and the timelines within which claims may be brought. There is no principle of limitation of common law and in the absence of any relevant provision in the 1980 Act, no limitation period will apply, although the doctrine of laches may prevent successful pursuit of an action.₁ The 1980 Act has been subject to several reforms over the years and many consider this area of the law to be unnecessarily complicated.

This article provides an update on the recent cases before the courts that have clarified to some extent the law of limitation and briefly describes the reform that the Law Commission is recommending.

Good news for the banks

InYorkshire Bank Finance Ltd v Mulhall & Anor[2008] the Court of Appeal held that the 1980 Act did not bar a claimant from enforcing a charging order even where more than 12 years had elapsed since the order was made.

In Yorkshire Bank the bank had obtained judgment in default against the defendants in 1991 and had subsequently obtained a charging order against the defendants’ interest in a property.

Between 1991 and 2007 the bank had taken no steps to enforce its judgment and in 2007 the defendants applied:

1. to set aside the judgment, on grounds that it had been obtained on a false basis; and
2. to set aside the charging order on grounds that the bank had failed to take any steps to enforce it.

The court at first instance dismissed the defendants’ application. The defendants appealed.

With regard to setting aside the charging order the defendants relied on two sections of the 1980 Act:

3. s20(1), which, in part, prohibits an action being brought after 12 years to recover monies secured by a mortgage or other charge on a property; and
4. s20(5), which, in part, prohibits actions being brought after six years to recover arrears of interest owing in respect of money secured by a mortgage or other charge.

The court was also referred to s24 of the 1980 Act that states that no action shall be brought upon any judgment after six years from the date that the judgment became enforceable.

The Court referred to Millett LJ’s decision in Ezekiel v Orakpo [1997] in which he had considered the application of the 1980 Act to charging orders. In Ezekiel, the court stated:

‘… the main ground of the appeal was that the claim to enforce the charging order was barred by s24(1) of the Limitation Act 1980, which provides that no action shall be brought upon any judgment after the expiration of six years from the date on which the judgment becomes enforceable. Leave to appeal was refused on the ground that the application was not to enforce the judgment, but to enforce the charging order, which, as Staughton LJ commented, “had a life of its own”.’

In Yorkshire Bank, the Court considered that the holder of a charging order was the equivalent of a secured creditor with the statutory equivalent of an equitable charge.

Accordingly, it was in that capacity that the creditor sought to recover what was due to them and not in the capacity of a judgment creditor. As such, s20(1) of the 1980 Act had no application to charging orders and although more than 12 years had elapsed since the making of the charging order, the bank would still be entitled to enforce it.

It was further submitted by the defendants that it would be inconsistent for the holder of an equitable charge, and in particular of a charging order, to be in a better position in terms of any limitation defence than the holder of a legal mortgage. Lloyd LJ did not accept this argument.

In the Court’s view in order to obtain a charging order, the creditor would already have successfully brought proceedings on the debt and the parties’ rights would have been established in those proceedings. It was not therefore illogical that different time limits should apply where the creditor already has a judgment, because:

‘… in such a case it is unnecessary to protect the defendant from stale claims on the basis that it may be difficult for him to collect together the relevant evidence. The parties’ rights have been established by court proceedings, and it is only then a question of enforcement.’

This case is important clarification for judgment creditors in today’s financial climate where there may well be difficulties in selling underlying properties secured by charging orders.

Good news for pensions professionals

The Court of Appeal has limited the circumstances in which claimants can pursue late claims against pensions professionals in its decision in Shore v Sedgwick Financial Services Ltd [2008].

Under the 1980 Act, negligence claims must be issued within six years from the date on which damage is suffered. Section 14A of the 1980 Act extends the limitation period for three years from when the claimant has/might be reasonably expected to have had the knowledge that they may bring a claim.

Claims for financial loss are distinguished between:

1. transactions giving rise to contingent liabilities (where there is a risk of a future claim but it might not materialise) in which case, time only starts to run when the loss materialises; and
2. transactions giving rise to actual damage (even though that damage might not yet be quantifiable) in which case, time runs from the date of the transaction.

Mr Shore had been advised by Sedgwick to transfer pension benefits held in an occupational scheme into an income draw down scheme in 1997. He did so and subsequently lost more than 50% of his maximum income. He commenced proceedings in 2005.

The High Court considered this to be a contingent loss case and that at the date of transfer, Mr Shore exposed himself to the risk of future loss that materialised in 1999 when annuity rates fell. The claim was statute barred because he brought his claim more than six years later.

The Court of Appeal, however, held that Mr Shore had obtained a bundle of rights that, from the outset, were less advantageous to him than the benefits enjoyed under the occupational scheme. The new scheme imposed no liability on him. Therefore, this was not a case of contingent loss and the damage had been suffered by Mr Shore in 1997. This was so even though there was a chance that Mr Shore would have been financially better off as a result of being exposed to the risk had annuity rates risen. The claim was still statute barred.

Mr Shore argued that he was not aware that he had a claim until 2004 when he saw a pensions specialist and a solicitor and that, by virtue of s14A of the 1980 Act, he could bring his claim up to three years from the date of his knowledge that he had a claim. The Court was not persuaded by his argument and found that Mr Shore should have known by May 2000 when his maximum income had been reduced by over 30% that he had suffered a loss that had been caused by the failure of Sedgwick to advise him to remain in the occupational scheme.

This decision provides useful guidance on the court’s view that a pension transfer is a transaction giving rise to actual damage and so time runs from the date of the transaction.

And for the lawyers

The court in Axa Insurance Ltd v Akther & Darby Solicitors & ors [2009] considered the House of Lords decision in Law Society v Sephton & Co (a firm) & ors [2006]and subsequent cases, including Shore, which dealt with determining when actual damage is suffered for the purposes of actions in negligence.₂ Axa brought claims against panel solicitors who it alleged had breached their duty to vet claims properly so that only those with a 51% or greater prospect of success were accepted for insurance by after the event (ATE) policies issued on behalf of Axa’s assignee National Insurance and Guarantee Corporation (NIG).

Axa argued that, because the prospects of success of the claims vetted by the solicitors were less than 51%, the insurer assumed a greater liability than it intended for the relevant premium and therefore did not get what it was the panel’s solicitors’ duty to ensure that it got.

Mr Justice Flaux considered the authorities in detail to determine when actual damage was first suffered in the case of ATE policies. Many of the policies had been taken out from 2001 onwards and the panel solicitors contended that actual damage was first suffered when each ATE policy was entered and that these claims were therefore time barred.

‘When the professional’s duty is to procure that a transaction had a particular characteristic or feature and in consequence of his breach of duty it does not, the cause of action accrues on entering the flawed transaction.’

Mr Justice Flaux referred to Lewison J’s judgment in Pegasus Management Holdings SCA & anor v Ernst & Young (a firm) & anor [2009] where he considered the decisions pre-Sephton. Lewison J concluded that those cases:

‘… where the client has engaged professionals in connection with a transaction to secure for him some property or rights, and because of the negligence of those professionals, the client acquires less valuable property or rights than he would have done if he had been given correct advice, he suffers damage at the time of the transaction, even if the property or rights are worth no less than he actually paid for them.’

Mr Justice Flaux considered the cases post-Sephton.₃ He considered that these supported the conclusion that, in cases in which a claimant enters a flawed transaction that does not have the features that, in accordance with the defendant’s duty, it should have had, if the transaction is one that the claimant would not otherwise have entered, then actual damage may well have been incurred at the time when the transaction was entered.

He concluded that actual damage was suffered by NIG when each ATE policy incepted. Just like Mr Shore, NIG was exposed to a greater degree of risk than it was entitled to expect if the panel solicitors had complied with their duty. NIG suffered actual loss when committed to the flawed policy and thus became exposed to the greater risk.

Action against fraudsters

The recent decision in the commercial court in Kuwait Oil Tanker Company SAK & anor v Al Bader & ors [2008] gives hope to those attempting to enforce judgments against fraudsters who may have assets in many jurisdictions. It makes clear that a judgment creditor can sue on their debt within the limitation period to produce a new enforceable judgment.

Mr Justice Moore-Bick found in favour of the claimants in their 1998 High Court proceedings for fraud and conspiracy. The claimants relied on this decision and made substantial recoveries of the defendants’ assets in the British Virgin Islands, Liberia and Switzerland.

As actions to enforce judgments must be brought within six years (s24 of the 1980 Act) and the limitation period was about to expire, the claimants commenced an action against the defendants for the outstanding judgment debt plus the interest under the original judgment.

The defendants argued that it was an abuse of process as the claimants had failed to enforce the judgment in full within six years.

This case is unique as it is the first in which a judgment creditor has sought judgment on a judgment debt in the case of an original judgment of fraud. Over the years, debtors have developed complex means by which to secure their proceeds of fraud and even the most vigilant and pro-active creditors encounter difficulties enforcing their judgment debts within six years.

Section 24(1) of the 1980 Act applies to actions on judgments, but not to execution of judgments. A judgment can be executed after six years, but permission of the court will be required. The defendants argued that an action on a judgment debt is an abuse of process because the statutory scheme allows enforcement by execution after six years. Suing on a judgment debt, therefore, is a means to avoid supervision by the court as required by the CPR.

Toulson J solved this concern by giving judgment with the stipulation that the ‘new’ judgment could not be enforced without leave of the court. So, a stay of execution was awarded, which the claimants could apply to have lifted. There was no reason for concluding that the second action was an abuse of process.

The claimants sought an action on the judgment, rather than relying solely on enforcement of the original judgment, to solve the administrative problems of enforcing overseas in countries where foreign courts insist on a recent judgment.

In the commercial court, where damages are being awarded more often and for greater sums so that defendants have increasing reason to evade enforcement, the ability to sue on a judgment debt is likely to become a more useful tool.

Breach of trust and fiduciary duties

Section 21(1) of the 1980 Act prevents fraudulent trustees from raising the defence of limitation and s38 extends the definition of ‘trustee’ to those in both implied and constructive trusts. It is generally accepted that s21(1)(a)is not limited to actions against a trustee and that provided there has been a fraud or a fraudulent breach of trust, an action can be brought against a third party now in possession of trust property.₄ Section 21(3) prescribes a six-year limitation period on breach of trust claims that do not fall within any other provision of the 1980 Act and postpones the limitation period in favour of certain categories of beneficiary.

In Statek Corporation v McNeill Alford & anor [2008], two directors of the company had been found to have wrongly and fraudulently deprived the company oflarge sums of money. Statek alleged that Mr Alford, a long-time business associate of the directors, in dishonest breach of his duties, had facilitated the misapplication of money received by him from the two directors. The company claimed damages by way of compensation from Mr Alford, or, alternatively that he was bound to account for the money received as constructive trustee. Mr Alford was found to have assisted the two directors.

Evans-Lombe J found that Mr Alford, whom he considered to be a seasoned and prodigious liar, constituted a de facto director of Statek and therefore owed fiduciary duties in respect of the assets within his control at that time. Mr Alford’s counsel had accepted that, if Mr Alford was found to be a director, his limitation defence would fail because s21(1) would apply and he would be a ‘trustee’ for the purposes of s21. No limitation defence would therefore apply.

However, in case he was wrong, Evans-Lombe J also considered the position if Mr Alford was only an accessory to the fraud.

He considered the cases of Paragon Finance Plc v D B Thakerar & Co (a firm) [1999] and Cattley & anor v Pollard & ors [2007].

In Paragon Finance, Millett LJ had distinguished defendants who are sued as constructive trustees into two categories:

1. those who have not been formally appointed as a trustee, but lawfully assumed that role before the breach of trust occurred (category 1 trustees); and
2. those whose status as trustees only arose from the transaction complained of (category 2 trustees).

Millett LJ said that there was a case for treating an accessory who has assisted a trustee in committing a breach of trust as subject to the same limitation periods as the trustee.

Directors of companies are fiduciaries for their companies of the assets of those companies that come under their control and so fall into category 1 (see Dubai Aluminium Co Ltd v Salaam [2003]).

In Dubai Aluminium, Millett LJ said that a category 2 constructive trustee could plead limitation as a defence to a claim because they were not really trustees. If, however, they participated in the wrongdoing, they should be liable to account as if they were a fiduciary.

Statek submitted that the limitation period applicable to a category 1 trustee and a category 2 trustee were the same by virtue of the words in s21(1) ‘action… in respect of any breach of trust’, which it submitted included actions in respect of a breach of trust by a category 1 trustee and in respect of dishonest assistance in that breach by a category 2 accessory.

Statek’s submission relied on the decision in Cattley: a person dishonestly assisting in a breach of trust is liable regardless of whether the trustee was fraudulent; there should be no reason for a different limitation period to apply depending on whether or not the trustee had acted fraudulently. An accessory to a breach of trust must be shown to have acted dishonestly to be made liable but, if they so acted, they are liable notwithstanding that the breach they assisted was itself innocent.

In Cattley, the deputy High Court judge, Mr Sheldon QC, held that s21(1) of the 1980 Act does not apply to claims against category 2 constructive trustees and therefore that the relevant limitation period (six years) under s21(3) applies. The deputy judge interpreted Lord Millett’s judgment in Dubai Aluminium as ‘dealing with a claim for dishonest assistance in a fraudulent breach of trust’ and found that the 1980 Act could be pleaded as a defence to the claim.

Evans-Lombe J did not agree with Mr Sheldon QC:

‘… nowhere in his judgment does Lord Millett describe the assistance given by Mr Amhurst to the fraud as being assistance to a fraudulent breach of trust… the case does not seem to proceed on the basis that… any of the… defendants were trustees or fiduciaries of the assets of the claimant whose fraud, in dealing with those assets,had been assisted by the actions ofMr Amhurst.’

Evans-Lombe J concluded that s21(1) of the 1980 Act does apply to accessories to fraudulent breaches of trust and therefore that no limitation period applies to claims against them. He did not consider the decision in Dubai Aluminium as authority to the contrary.

Therefore, even if Evans-Lombe J had been wrong in his finding that Mr Alford was a category 1 fiduciary, he would not have followed Mr Sheldon QC’s decision in Cattley and would have concluded that no limitation period applied to Statek’s claim against him as an accessory to that fraudulent breach of trust.

Clearly, this is an area that needs further clarification.

Reform

The Law Commission has recommended a comprehensive review of the law on limitation periods (see the Law Commision’s consultation paper on limitation of action No 151, January 1998). It is considered that the wide range of ad hoc reforms has led to much incoherence and complexity. The traditional approach of limitation periods running from accrual of a cause of action has led to problems that the legislature has tried to solve either by moving to a discoverability starting date or by relyingon a judicial discretion to disapply the limitation period.

The Law Commission proposes a core regime with central features of:

1. an initial limitation period of three years running from when the plaintiff knows, or ought reasonably to know, that they have a cause of action;
2. a long stop limitation period of ten years running from the date of the act or omission giving rise to the claim (30 years for personal injury claims);
3. the claimant’s disability and deliberate concealment by the defendant (initial and subsequent) would extend the initial limitation period; and
4. the courts would not have a discretion to disapply a limitation period (except in relation to personal injury claims).

It is proposed that the core regime would apply to the majority of tort actions, contract claims, restitutionary actions, breach of trust and related actions, actions on a judgment or arbitration award and actions on a statute.

It is proposed that parties would be free to alter the length or starting date of the initial limitation period by contract and that claimants would be able to add new claims in existing actions where they were sufficiently related to the original cause of action, even where the limitation period has expired since the proceedings were started. The burden of proof on limitation should continue to be on the claimant.

A draft Civil Law Reform Bill, which will deal with, inter alia, limitation is due to be published this year. This new Bill will hopefully simplify this area of law that many consider to be uneven, uncertain and unnecessarily complex. In the meantime, however, we will have to rely on the Court of Appeal for clarification.

By Natalie Roberts, associate, SJ Berwin LLP.

For further information on limitation periods, please contact Rachel Morgan.

E-mail: rachel.morgan@sjberwin.com.

Tel: 020 7111 2461.