Shore v Sedgwick Financial Services Ltd – exposure to risk of future loss by negligent pensions advice

[2007] EWHC 2509 (Admin)

The claimant brought an action against Mr Ormond, his SFS financial adviser, alleging that he negligently advised him in January 1997 to transfer his accrued benefits in his occupational benefits scheme (the Avesta scheme) into the Scottish Equitable's personal pension fund withdrawal scheme (the PFW scheme) during March and April 1997 (the primary claim). He also claimed that, having transferred his benefits to the PFW scheme on 28 April 1997, by 31 July 1997 when it became clear that he was not going to be working as a consultant after he retired, he should have been advised to purchase an annuity (the secondary claim).

The judge rejected the primary claim but held that Mr Ormond had breached his duty by failing to advise the claimant about the possibility of an annuity and its advantages in comparison with the risks of continuing to draw the maximum permitted income under the PFW scheme.

The defendants claimed that both claims were time-barred. The proceedings were begun on 29 September 2005. The claimant argued that he had not suffered any damage so as to complete his cause of action until he was financially worse off. He claimed that this did not occur in relation to the successful secondary claim until the first triennial review reduced his income on 25 May 2000.

The judge agreed with the claimant that he had not suffered any loss on 28 April 1997 when he transferred out of the Avesta scheme nor on 31 July 1997, the last day on which Mr Ormond should have advised him to purchase an annuity. Although he was exposed to the risks of the PFW scheme, those risks might not have materialised - indeed, had investment performance and annuity rates been satisfactory, he would have done better under the PFW scheme than under either the Avesta scheme or with an annuity.

Applying the House of Lords’ decision in Law Society v Sephton, the judge characterised this case as one where the claimant was exposed to the risk of a possible future loss. He did not suffer a loss immediately upon entering into the relevant transaction as was the case, for example, in Knapp v Ecclesiastical Insurance Group plc where the claimant entered into a voidable insurance policy as a result of the negligence of his broker. The present case was more akin to the lender decisions (Nykredit Plc v Edward Erdman Ltd) where the transaction in question has both benefits and burdens and the claimant suffers loss and damage only when it is possible to say that he is on balance worse off.

On this basis, the secondary claim accrued at the latest by the end of February 1999 when annuity rates reached a new low. The claimant was in a worse but not yet quantified position at this date, even though up until the triennial review on 25 May 2000 he continued to receive slightly more income a month than he would have done had he purchased an annuity. The claim was therefore time-barred. The question of the claimant’s knowledge then became material for the purpose of relying upon the additional three year period under s14A Limitation Act 1980. This case was similar to that in Haward v Fawcetts – applying the same approach, the judge concluded that the claimant had had the relevant “broad knowledge“ of his loss and its cause by May 2000 and probably by December 1999 when he was told of the risks of drawing the maximum income. The claim was accordingly dismissed.

Comment: the House of Lords’ decision in Law Society v Sephton endorsed to some extent the approach of the Australian courts exemplified by Wardley Australia Ltd v State of Western Australia concerning the later accrual of causes of action in tort where the liability in question is purely contingent. At the same time it upheld the Forster v Outred line of authority (including Knapp v Ecclesiastical Insurance Group plc) which states that where the claimant suffers a diminution in the value of an existing asset or has been disappointed in an asset which he acquires, whether it is a house, a business arrangement, an insurance policy or a claim for damages, his cause of action will still accrue at the date at which the claimant acquired the defective asset or insurance even though the extent of the claimant’s financial loss is not yet known or may in fact never occur. It had been thought, therefore, that professional indemnity insurers would still be able to take advantage of an early accrual date in most of their cases which are likely to concern an existing asset or transaction. Whilst this is will still be true in many cases, the decision in Shore illustrates the potential for expanding the category of cases in which the loss is held to be contingent and so to defer the accrual of the cause of action to the point where the claimant first suffers a financial loss. This decision will undoubtedly lead to more arguments about limitation in cases against professionals and encourage claimants to try to postpone accrual where they are unable to rely upon s14A.