Tuesday, 16 May 2006

BRITANNIA FOLLOWS THE AUSTRALIAN WAY!

On 10 May 2006, the House of Lords determined the matter of Law Society v Sephton & Co (A Firm) and effectively increased the statutory time limit for pursuing a claim for professional negligence from six to fourteen years. Lord Hoffman approved the reasoning set out in the Australian High Court case of Wardley Australia v State of Western Australia in which it was held that a plaintiff: "suffers no actual damage until the contingency is fulfilled and the loss becomes actual; until that happening the loss is prospective and may never be incurred". The thrust of that case in 1992 was to put in place a mechanism for assessing when an action in tort should be considered time barred where the effect of statutory provisions was not clear. It represented then a significant departure from earlier English authority. Lord Hoffman has now made the same departure.

The Facts

In May 2002 the Law Society of England and Wales (the Society) initiated proceedings against Sephton & Co (Sephton), a firm of accountants, on the grounds of a series of negligently prepared annual reports on behalf of Mr Payne, a sole practitioner. Mr Payne had been stealing client monies continuously between 1989 and 1995. Despite the repeated theft by Mr Payne, Sephton failed to notice the misappropriations and certified that the accounts and each report complied with the Solicitor Account Rules 1991 (UK). The true extent of the fraud came to light after an investigation by the Society upon receipt of a complaint from one of Mr Payne's clients. Subsequently, the Society compensated the defrauded clients a combined total of £1.245m (nearly $3m).

The Judgments

The key issues considered at first instance involved questions of when time began to accrue in order for the Society validly to pursue a claim for professional negligence against Sephton. Sephton submitted that accrual occurred when the Society accepted and relied on the reports and/or when the theft occurred. Conversely, the Society submitted that the relevant period for limitation purposes commenced at the date of payment of compensation.

The judge,agreed with Sephton's approach, taking the view that the Society incurred damage more than six years before it commenced proceedings as a result of a contingent risk of future compensation payments. Following the reasoning in Foster v Outred actual damage "is any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency".

The Court of Appeal, in its majority, disagreed with the judgment at first instance and distinguished the meaning of "contingent loss" and "mere risk of loss". They reinstated the proceedings on the basis that time began to accrue when the Society made actual payments, as events prior to payment only indicated a "risk of loss". Interestingly, the dissenting judge took the approach that time began to run upon each separate misappropriation by Mr Payne as this had opened up the Society to a contingent liability to compensate the defrauded clients.

The House of Lords agreeing with the Court Appeal held that the Society's contingent liability was not damage until the contingency (or loss) actually occurred. In other words, whilst Mr Payne's theft brought about a liability for the Society to make compensation payments from its fund, it was contingent on the theft not being rectified and a claim in proper form being made.

The Consequences

Whilst the House of Lords landmark judgment may ring alarm bells in the UK and cause concern amongst professionals generally, it does not seem to be "new news" in the Australian jurisdiction. The 1992 Australian High Court case of Wardley has been variously applied and followed in Australia. It is interesting, however, that the House of Lords has now chosen to follow and approve an Australian case, ignoring the traditional Foster v Outred approach which the House of Lords itself had previously approved in other English cases. This latest English decision is a reminder of the frequent importance and relevance of international elements in determining liability issues in the global insurance market.

Colin Porter
Principal


cporter@accentonlegal.com