Statutory duties will often include a set limitation period stating how long a party has to bring a claim for breach, often six years. However, equitable claims, such as a breach of fiduciary duties, do not have express limitation periods. Because of the lack of an express limitation period for equitable claims, courts will apply a limitation period from a similar, or analogous, cause of action at law to the equitable claim. This complex area of law is known as “limitation periods by analogy”.
Equity has long accepted that limitation periods by analogy are not absolute, and courts will not apply the limitation period if to do so would be “unconscionable”. What “unconscionable” means in these circumstances has historically been subject to judicial debate but appears to have been settled by the 2014 decision of the NSW Court of Appeal in Gerace v Auzhair Supplies Pty Ltd (Gerace).
In Gerace the Court made it clear that, where it has been established that there is an analogous cause of action, a court does not retain any general discretion as to whether the limitation period is to be applied by analogy based on the fairness of the circumstances. The only ground for refusing to apply the limitation period by analogy is the existence of an equitable cause of action, such as fraud or fraudulent concealment.
Lately, Ball J of the Supreme Court of New South Wales applied the principles in Gerace in Malek Fahd Islamic School Limited v The Australian Federation of Islamic Councils Inc  NSWSC 1712.
Malek Fahd Islamic School Limited v The Australian Federation of Islamic Councils Inc
This case was the culmination of a long running dispute between Malek Fahd Islamic School (MFIS) and the Australian Federation of Islamic Councils (AFIC) concerning the funding and operation of a number of schools in New South Wales.
The principal allegation was that AFIC breached fiduciary duties that it owed to MFIS by virtue of it being a shadow director.
AFIC admitted that it was a shadow director but denied that it had breached various duties as alleged by MFIS.
The Court largely agreed that AFIC had not breached its duties as a shadow director, but to the extent it was found to have breached any duties, the Court considered whether any of those claims based in equity were time barred.
AFIC argued that the equitable duties that MFIS alleged were analogous to causes of action under the Corporations Act, and accordingly any action was barred by the application of the analogous limitation period. It also submitted that there was no allegation of fraud or fraudulent concealment against AFIC and there was no evidence on the basis of which such an allegation could be made. This would mean that there was no unconscionability in applying the limitation period by analogy.
However, MFIS argued that the definition of what is “unconscionable” should be broadly redefined to look at the conduct of each party as a whole, and sought to rely on observations of White J in Issa v Issa in support of its argument.
The Court refused to expand the test in this way, and accepted AFIC’s argument that the relevant equitable duties in this case were analogous to statutory causes of action, and accordingly any action in equity was time barred.
The Court also noted that MFIS failed to plead unconscionable conduct in their pleadings. The Court held that MFIS was not allowed to run the argument at the hearing, as to do so would take AFIC by surprise. Accordingly, even if the Court were to accept MFIS argument on expanding the test, MFIS should have properly pleaded the argument prior to the hearing.
The take away points from Ball J’s judgment on limitation periods can be summarised as follows:
- limitation periods from a statutory cause of action can be applied to an analogous equitable cause of action;
- if an analogy exists, the Court must apply the limitation period unless it would be unconscionable to do so;
- unconscionability in these circumstances means the innocent party could bring an equitable cause of action, such as fraud or fraudulent concealment;
- unconscionability does not involve looking at the broader conduct of the parties generally, in a way that is similar to an analysis to a breach of the Australian Consumer Law; and
- any argument regarding unconscionability ought to be properly pleaded so the parties are not taken by surprise.