Time limits (known as limitation periods) within which a claim must be brought are governed by the Limitation Act 1980. In contract, the primary limitation period is 6 years from the date of breach (or 12 years if the contract is executed as a deed), whereas in negligence it is 6 years from the date of damage - a potentially crucial difference.
Whilst assessing when a breach of contract occurred is a relatively straightforward exercise, determining when damage has been suffered as a result of a negligent act can be both difficult and uncertain. Moreover, because damage is often only sustained (or only discovered) sometime after a breach of duty has occurred, it can give rise to extended periods of liability, particular for surveyors working within the property market. Take the following and not uncommon examples:-
A Lenders Claim
Surveyor & Co (“SC”) are instructed by Bank Limited (“the Bank”) to value a house in connection with a mortgage application by Mr Smith. SC submits its report to the Bank in June 2005 ascribing a value of £300,000 to the property. Relying on that report, the Bank advances £285,000 to Mr Smith who proceeds to buy the property in August 2005 for the £300,000 it was valued at by SC. In November 2007, Mr Smith loses his job, causing him to miss several repayments before finally defaulting in September 2008. On obtaining possession in December 2009, the Bank markets the property through a local estate agent who values it at just £250,000, prompting the Bank to commission a retrospective valuation which reveals that, as at June 2005, the “true value” of the property was £220,000. The Bank then spends the next 18 months trying to sell the house for £250,000 before eventually disposing of it at auction for £220,000 in June 2011. Shortly thereafter, the Bank notifies SC of its intention to make a claim but it is not until May 2014 that it actually gets around to issuing proceedings against SC, claiming damages for breach of contract and/or negligence.
The Bank’s claim for breach of contract will clearly be ’statute barred’ since the breach complained of, (namely, the submission of the valuation report in June 2005) occurred more than 6 years before proceedings were issued in May 2014. However, that still leaves the negligence claim (as SC owes duties to the Bank in both contract and tort). At first glance, it might be thought that the Bank suffered damage when its advance was used to purchase the property in August 2005 (which would mean the claim was statute barred in August 2011). However, the Bank didn’t purchase the property; instead, it lent money to Mr Smith using the property as security for its loan. The House of Lords in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No2) held that determining when a lender had suffered damage involved an assessment of (a) the amount of money lent, against (b) the true value of the property and the value of the borrower’s repayment covenant. In other words, when the amount lent exceeds the true value of the property and the value of the borrower’s covenant, damage will have been suffered.
So how does one go about valuing a personal covenant? The simple answer is not very easily. In DnB Mortgages Ltd v Bullock & Lees  the court heard evidence from credit experts who adopted a discounted cash flow approach to assess the value of the borrower’s covenant (although precisely how they went about this is unclear from the case report). On the facts of that case, having regard to the extent of the overvaluation and the borrower’s bleak personal circumstances (he was eventually made bankrupt), the court concluded the lender had suffered damage (and so time had started to run for limitation purposes) several months before the borrower even defaulted on his mortgage repayments.
Applying the approach taken in DnB Mortgages to our example would probably result in damage being regarded as being sustained on or before November 2007 i.e. as soon as Mr Smith started to get into difficulty making payments rather than at the stage of any final default (as the overvaluation was significant and the covenant looks poor). On that basis, the claim in negligence, as well as that in contract, would also be statute barred, since more than 6 years would have elapsed since the damage was sustained. However, it should be noted that there has been no reported case where the mechanics of assessing a borrower’s covenant has been properly addressed (the Court of Appeal expressed its confusion at the evidence inDnB Mortgages) and it remains to be seen how closely the approach in DnB Mortgages will be followed. What can be said with certainty is that the greater the overvaluation the less significant the borrower’s covenant will be.
The Defective Property
Using Mr Smith again, assume that rather from losing his job Mr Smith is promoted and, in February 2014, he decides he can afford to move to a bigger house. Unfortunately for Mr Smith, several prospective sales for his property fall through as each buyer pulls out citing an adverse survey. The estate agent tells Mr Smith that this is due to signs of subsidence having been noted such a sloping floors and sticking doors. Mr Smith recalls that the property was like that when he moved in, but he had put it down to it being an old house. However, on learning that the movement (because of uncertainty over whether it is historic or progressive) has blighted the property and as it’s going to cost £30,000 of underpinning and ancillary work to turn it into a mortgageble proposition, Mr Smith commissions a retrospective survey to check exactly what it would have been worth in 2005. He is told that taking into account the work needed to the property, it was worth no more than £250,000. As Mr Smith has no contract with SC (who were in contract only with the Bank) he sues SC in negligence (on the basis that he was owed a duty of care since, he argues, it was foreseeable he would rely on the Bank’s valuation).
SC can raise a limitation defence as Mr Smith purchased the property (and suffered damage) in June 2005, which would mean any claim became prima facie statute barred under the Limitation Act 1980 in July 2011. However, section 14A of the Limitation Act provides that a party can bring a claim in negligence outside the 6 year limitation period, providing it can be shown they did not have the requisite degree of knowledge of the negligent act or omission in the 3 years preceding the issue of any claim.
It should be noted that “knowledge” does not require a party to know that they have a viable claim in negligence, but they must know enough to make a reasonable person begin to investigate whether he or she has a claim. In Mr Smith’s case, that would mean seeing sufficient cracking or movement to prompt a reasonable person to seek advice.
Steps to Minimise Limitation Issues
Although the requirement to show damage and/or knowledge of that damage can lead to potentially long limitation periods, the Limitation Act 1980 as amended by the Latent Damage Act 1986 does provide some respite in the form of a 15 year ‘long stop’ date from the date of the negligent act or omission. Outside of that, the only way of limiting liability is by way of contractual agreement, but:-
- A clause limiting liability to, say, 6 years in both contract and negligence is unlikely to be accepted by panel lenders.
- There is a better prospect of the clause being accepted by other commercial clients but its effectiveness will be subject to a reasonableness test under the Unfair Contracts Terms Act 1977 (“UCTA”).
- A clause limiting liability in a consumer contract is almost bound to fail the test under UCTA and the Unfair Terms in Consumer Contract Regulations 1999.
- Any term limiting liability agreed with a lender is also very unlikely to bind a consumer who relies on that report. It would be as effective as a clause in a mortgage valuation saying the report is for the lender only and should not be relied upon by a mortgagee. But that, of course, is another story.