The law on limitation – or the requirement to issue a claim within a defined period of time, as determined by Parliament – is a fundamental consideration in all forms of dispute. It is so fundamental that practitioners acting both for claimants and defendants will begin every case by asking the same question: is this claim time-barred? If you are the defendant, your focus inevitably turns to the grounds on which you might answer that question in the affirmative, so as to give you an outright defence to the claim without getting into knotty questions of duty, breach, causation or loss.
Limitation in connection with claims against surveyors and valuers can have an added level of complexity. In many cases, negligence will arise as a consequence of “latent damage”. In other words, some act, neglect or default which is not reasonably discoverable until sometime after it occurs.
There are often times when the negligence may not come to light for many years – usually for claims against surveyors because the consequences have been concealed by the rising property market.
What should you do when faced with such a claim? Are such claims “in time”? Can they be defended on technical grounds and what can you do now to help the future defence of such claims?
The Limitation Act 1980 provides that there are different limitation periods for different types of cause of action, but generally:
- A claim founded on simple contract has a limitation period of six years from the date on which the contract was breached
- A claim founded in tort has a limitation period of six years from the date on which the claimant suffers damage
These time limits are often referred to as “primary limitation” in lender claims. In a typical lender claim in relation to a valuation, the bank instructs a surveyor to value the property, so that the bank can form a view on whether the property will provide adequate security for the loan. If things do not go to plan, the bank can consider a claim against the surveyor in one of two ways: breach of contract or breach of duty of care, or indeed both. In both cases, the bank’s entitlement to sue expires after six years, but (sometimes critically) the clock begins to run from different dates depending on the basis on which the claim is advanced.
The start date for the limitation period in relation to a claim for breach of contract is usually easily identified: it will generally be the date on which the valuer provided the allegedly negligent valuation.
Identifying the start date for a claim in tort, ie the date on which the claimant suffers damage, can be more problematic. The principle established by the House of Lords in Nykredit Mortgage Bank PLC v Edward Erdman Group Limited (no 2) (1997) is that the lender will suffer damage when the amount of the loan exceeds the package of borrower covenants and security to which the lender has access in respect of that loan. This may not always be immediately upon drawdown of the loan, especially if the loan was at a relatively low loan-to-value ratio. The uncertainty of valuing the borrower’s covenant and the lender’s security (including the property which is the subject of the claim), and fluctuations in these values due to market forces, can make it very difficult to identify exactly when the lender suffered damage. Often it is not possible to be certain until the court has given judgment on what the values were at the relevant time.
Latent Damage Act 1986
The Latent Damage Act came into being in 1986 in order to address a perceived unfairness for claimants who only discovered that they had a claim more than six years after the date of breach/date on which damage is suffered. The 1986 Act operates principally by inserting sections 14A and 14B into the 1980 Act.
Under section 14A of the 1980 Act, if, at the time the claimant’s cause of action (in negligence) accrues, he does not have knowledge of all material facts to enable him to know that he has a cause of action, the limitation period will be the later of:
- Six years from when the cause of action accrued
- Three years from the date the claimant knows or ought to have known:
- The material facts about the loss suffered
- That the loss was attributable in whole or in part to the act or omission alleged to constitute negligence
- The identity of the defendant
Section 14B provides a longstop date of 15 years. This means that claims brought 15 years or more after the date of the alleged negligence, irrespective of whether the cause of action has accrued, will be time-barred. In addition, where there have been successive acts of negligence, each separate act will effectively set the 15-year longstop running afresh.
The key element of section 14A is knowledge – specifically the claimant’s knowledge both that he has suffered a loss and that the loss was attributable to the defendant. In lender claims, the lender will often know early on that it has suffered, or will suffer, a loss ie a shortfall on the recovery of the loan. However, it may not realise until later that one of the contributing factors was an allegedly negligent valuation at the outset of the loan.
The knowledge required for section 14A includes constructive knowledge. This means knowledge that a person might reasonably have been expected to acquire, whether from a factual situation which they can observe/ ascertain, or with the help of an expert, where it is reasonable for such an expert to be consulted.
By definition, claims in which limitation issues arise will relate to historic matters, involving staff who may have moved on or retired. Memories will have faded and people may no longer have clarity on what happened at the material time. This can create risks, since a potential answer to a claim may have been forgotten. The following practical advice should be borne in mind:
- Make sure fee earning staff keep clear records evidencing the instructions they receive, any changes to it or development in those instructions, the work they have undertaken and any assumptions they have made
- Where possible, files should be scanned and saved in an easily accessible electronic format
- Have a clear document retention policy
- There might be a temptation to try to shorten the limitation period by contractual means. This is possible, but it is important to note that such a provision may be subject to the reasonableness test pursuant to the Unfair Contract Terms Act 1977 – see, for example, the recent decision of the Manchester County Court in Goel and Trivedi v Ryanair (2015)
- If a claim does arise, don’t panic: there are many grounds on which you can show that a claim has been issued out of time, which, if argued successfully, may provide a complete defence