A COUNTERCLAIM IS SUBJECT TO THE SAME RULES AS LIMITATION AS A CLAIM: SECTION 35 OF THE LIMITATION ACT CONSIDERED BY THE COURT OF APPEAL

In the judgment today in  Al-Rawas -v- Hassan Khan (A Firm) [2017] EWCA Civ 42 the Court of Appeal held that a counterclaim did not have any special status under the Limitation Act. It was subject to the same principles as if it were a claim.

On any view, section 35 of the Limitation Act is not a model of clarity. It has been described by Professor Andrew McGee as “one of the most convoluted provisions in the entire law of limitations”, an observation cited with approval by Lord Collins of Mapesbury”

KEY POINTS

  • Section 35 of the Limitation Act 1980 does not allow a party to bring a counterclaim for an action that would otherwise be statute barred.

THE ACTION

The claimants were firms of solicitors suing for their fees. The defendants counterclaimed alleging professional negligence.   The claimants responded that the counterclaims were statute barred and made an application for summary judgment and to strike out the counterclaim. This was refused by the Master but allowed, on appeal by the High Court Judge.  The defendants appealed to the Court of Appeal.

SECTION 35 OF THE LIMITATION ACT 1980

“New claims in pending actions; rules of court

(1) For the purposes of this Act, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced –

(a) in the case of a new claim made in or by way of third party proceedings, on the date on which those proceedings were commenced; and

(b) in the case of any other new claim, on the same date as the original action.

(2) In this section a new claim means any claim by way of set-off or counterclaim, and any claim involving either –

(a) the addition or substitution of a new cause of action; or

(b) the addition or substitution of a new party;

and ‘third party proceedings’ means any proceedings brought in the course of any action by any party to the action against a person not previously a party to the action, other than proceedings brought joining any such person as defendant to any claim already made in the original action by the party bringing the proceedings.

(3) Except as provided by section 33 of this Act or by rules of court, neither the High Court nor any county court shall allow a new claim within section 1(b) above, other than an original set-off or counterclaim, to be made in the course of any action after the expiry of any time limit under this Act which would affect a new action to enforce that claim.

For the purposes of this subsection, a claim is an original set-off or an original counterclaim if it is a claim made by way of set-off or (as the case may be) by way of counterclaim by a party who has not previously made any claim in the action.

(4) Rules of court may provide for allowing a new claim to which subsection (3) above applies to be made as there mentioned, but only if the conditions specified in subsection (5) below are satisfied, and subject to any further restrictions the rules may impose.

(5) The conditions referred to in subsection (4) above are the following—

(a) in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as are already in issue on any claim previously made in the original action; and

(b) in the case of a claim involving a new party, if the addition or substitution of the new party is necessary for the determination of the original action.

(6) The addition or substitution of a new party shall not be regarded for the purposes of subsection (5)(b) above as necessary for the determination of the original action unless either—

(a) the new party is substituted for a party whose name was given in any claim made in the original action in mistake for the new party’s name; or

(b) any claim already made in the original action cannot be maintained by or against an existing party unless the new party is joined or substituted as plaintiff or defendant in that action.”

THE QUESTION FOR THE COURT OF APPEAL

The question was set out by Lady Justice Sharp

  1. The question of construction that arises is this. C brings a claim against D, which is in time. D (not having previously made any claim in the proceedings) wants to counterclaim against C, but a fresh action to advance that counterclaim would be out of time at the time when C’s claim is brought. Does section 35 of the Limitation Act, in particular subsections (1) and (3) of section 35, nevertheless allow D to bring the counterclaim, as a matter of right?

THE CONCLUSION:
    1. On any view, section 35 of the Limitation Act is not a model of clarity. It has been described by Professor Andrew McGee as “one of the most convoluted provisions in the entire law of limitations”, an observation cited with approval by Lord Collins of Mapesbury JSC in Roberts v Gill [2010] UKSC 22; [2011] 1 AC 240, at para 3.
    2. The Limitation Act is a consolidating measure, and is divided into three parts. Part I is headed “Time limits under Part I subject to extension or exclusion under Part II”. The ordinary time limits for bringing actions (of the classes mentioned in Part I of the Limitation Act 1980) are given in that Part. Those ordinary time limits are then subject to extension or exclusion in accordance with the provisions of Part II: see section 1 of the Limitation Act. Part II of the Limitation Act is headed “Extension or Exclusion of Ordinary Time Limits” and provides for the extension or exclusion of these ordinary time limits in particular cases. Section 32A for example, gives the court a discretion to exclude the time limit for actions for libel, slander or malicious falsehood and by section 33, the court has a discretion to exclude the time limits for actions in respect of personal injuries or death.
    3. Section 35 of the Limitation Act is not in Part II of the Limitation Act, but in Part III (Miscellaneous and General Provisions). It was enacted in its current form following the recommendations made by the Law Reform Committee in 1977 in its Final Report on Limitation of Actions: Cmnd 6923. The legislative history of section 35 is summarised in Roberts v Gill at paras 24 to 37.
    4. Section 35 applies the Limitation Act to new claims made in the course of an action, including claims by way of set-off or counterclaim, and claims involving the addition or substitution of a new cause of action or a new party. Its two main objectives are to enable a claimant to amend pleadings out of time so as to sue in another capacity; and to enable parties to be added out of time where joinder is necessary if the claimant’s claim is to succeed: see Roberts v Gill at paragraph 2. The complexity of section 35 arises in part because of the somewhat disparate number of matters that it deals with, some procedural and some substantive. Sections 35(1) and 35(3) lay down binding rules, and the remainder of the section provides for rules of court to be made permitting amendments, subject to conditions, by way of new causes of action and new parties: see Roberts v Gill at para 32.
    5. At para 38 of Roberts v Gill Lord Collins summarised so far as relevant to that appeal, the effect of the provisions of section 35, and the Civil Procedure Rules with which section 35 must be read:
“(1) A new claim means a claim involving either (a) the addition or substitution of a new cause of action; or (b) the addition or substitution of a new party: section 35(2).
(2) Any new claim made in the course of an action is deemed to have been commenced on the same date as the original action: section 35(1).
(3) No such new claim may be made after the expiry of any applicable limitation period, except as provided by rules of court: section 35(3).
(4) Rules of court may provide for allowing a new claim, but only (a) in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as are already in issue on any claim previously made in the original action; and (b) in the case of a claim involving a new party, if the addition or substitution of the new party is necessary for the determination of the original action (i.e. any claim made in the original action cannot be maintained by an existing party unless the new party is joined as claimant or defendant): section 35(4), (5), (6). The relevant rules of court are in CPR 17.4 and 19.5.
(5) CPR 17.4(2) has the effect that a new claim may be added by amendment but only if the new claim arises out of the same facts or substantially the same facts as the original claim.
(6) CPR 19.5(2), (3) have the effect (among others) that a new party may be added only if the limitation period was current when the proceedings were started, and the addition of that party is necessary in the sense that the claim cannot properly be carried on by the original party unless the new party is added.
(7) Rules of court may allow a party to claim relief in a new capacity: section 35(7). The relevant rule is CPR 17.4(4), by which the court may allow an amendment to alter the capacity in which a party claims if the new capacity is one which that party had when the proceedings started, or has since acquired.”
    1. Section 35(1)(b) deems the commencement date for new claims made during the course of an action to be the date when the action was commenced, rather than the date when the new claim was made. It is to be noted that the deeming provision applies to “any new claim”; and that by virtue of section 35(2), in “this section”, that is, in section 35, a new claim means “any claim by way of set-off or counterclaim”. (emphasis added)
    2. The origin of section 35(1) is to be found in section 28 of the Limitation Act 1939. This provided that:
“For the purposes of this Act, any claim by way of set-off or counterclaim shall be deemed to be a separate action and to have been commenced on the same date as the action in which the set-off or counterclaim is pleaded.”
    1. The purpose of making “the issue of P’s writ, the terminus ad quem for D’s counterclaim” is to prevent the injustice which may be caused where a claimant, by timing his claim carefully, can deprive the defendant of an effective answer to his claim: see the Law Reform Committee’s Final Report on Limitation of Actions: Cmnd 6923, para 5.7.
    2. The doctrine of relation back also has implications however for new claims added to an existing action by amendment, as Tomlinson LJ explained in Ballinger v Mercer [2014] EWCA Civ 996; [2014] 1 WLR 3597, at para 25:
“It must be borne in mind that the context of the debate is the doctrine of relation back introduced by section 35(1) of the Limitation Act 1980. If a new claim is permitted by way of amendment it is treated as having been made by way of a separate action commenced on the same date as the original action. So where an amendment is permitted to introduce a new cause of action which was in time at the date of the commencement of the action but arguably out of time on the date on which permission to amend is granted, the defendant is therefore precluded from reliance at trial on the arguable limitation defence.”
    1. Although the word “amendment” is not used, section 35(3) is of course, principally concerned with amendment. Section 35(3) provides that the general rule is that new claims, “within section (1)(b)” i.e. those made in the course of any action, including “any claim by way of set-off or counterclaim” shall not be allowed after the expiry of any time limit under the Limitation Act, which would affect a new action to enforce that claim. To this general rule, there are two exceptions: first, as provided by section 33 of the Limitation Act, and secondly, by rules of court.
    2. Section 33 provides for the discretionary exclusion of the time limit for actions in respect of personal injury or death. Where section 33 applies, the time limit has been disapplied altogether, and no question of relation back can arise. It is the second ‘rules’ exception, which is material here. In my view, the disputed sub-clause, “other than an original set-off or counterclaim” simply excepts “an original set-off and counterclaim” as defined by section 35(3) from the special restrictions which sections 35(4) and (5) and the relevant rules of court made pursuant to those subsections, otherwise apply to the addition of time-expired claims made in the course of an action. To that extent, this creates a discrete exception to the general rule that new claims, “within section (1)(b)” shall not be allowed after the expiry of any time limit under the Limitation Act, which would affect a new action to enforce that claim; and also a specific exception to the application of the rules restricting the circumstances in which such claims may be added.
    3. An “original set-off or counterclaim” does not however cease to be a new claim made during the course of an action for the purposes of section 35(1)(b); still less is it removed from the operation of the primary periods of limitation contained in Part I of the Limitation Act. Its deemed date of commencement is the date of the original action; and for limitation purposes, it therefore gets the benefit of the doctrine of relation back, but no greater benefit.
    4. Section 35(3) thus achieves two objectives: it provides for the restriction of the circumstances in which amendments permitting time-expired claims may be made (through the ‘rules’ route), whilst preserving the protection of the doctrine of relation back for a defendant, where the claimant commences proceedings very close to the limitation period.
    5. The matter was put in this way by the Law Commission, under the Chairmanship of Carnwath J, as he then was, in its report on Limitation of Actions: no 270, in 2001, at para 5.6 and at footnote 10 to that paragraph:
“Where a party seeks to add a new claim to existing proceedings the new claim is treated as having been commenced on the same date as the original proceedings (that is, the claim is ‘related back’ to the date on which the original proceedings were commenced). Where any fresh proceedings to commence such a claim would have been time-barred, the effect of this provision is to deny the defendant to the new claim an opportunity to raise a limitation defence. For this reason, special restrictions are imposed on the ability to add such new claims.”
    1. Footnote 10 went on to say:
Two exceptions are made to the imposition of these special restrictions: Limitation Act 1980, s 35(3). First, no restrictions are imposed where the court exercises its discretion under Limitation Act 1980, s 33 to exclude the relevant time limits for actions in in respect of personal injuries or death. Secondly, no restrictions are imposed where the new claim is brought by way of an original set-off or counterclaim … The purpose of this second exception is to protect the defendant’s position where the claimant commences proceedings very close to the limitation period.”
    1. Thus, while I agree there is a syntactical ambiguity in the wording of section 35(3), in my view, the subsection does not have the meaning or effect for which Mr Rainey contends.
    2. Roberts v Gill was not concerned with the phrase “other than an original set-off or counterclaim” on which this appeal has focused. For the purposes of this appeal however, I would respectfully add to Lord Collins’ analysis set out at para 25 above, the following words in italics (adding the first two paragraphs to put the addition into context):
(1) A new claim means a claim involving either (a) the addition or substitution of a new cause of action; or (b) the addition or substitution of a new party: section 35(2).
(2) Any new claim made in the course of an action is deemed to have been commenced on the same date as the original action: section 35(1).
(3) No such new claim, other than an original set-off or counterclaim, may be made after the expiry of any applicable limitation period, except as provided by rules of court: section 35(3).
    1. In my opinion, this analysis finds support from other interpretative factors, and from some observations made (obiter) in two cases to which we were referred.
    2. As Ms Mulcahy submits, it is difficult to discern any intelligible legislative policy behind a provision which would enable a counterclaim of any age, and no matter how stale, to be pursued, merely because, as a matter of happenstance, the party raising such a new claim, had been sued. The judge pointed to the absence of clear words mandating such a surprising result; and she characterised such an intention as ‘capricious’ and productive of legal uncertainty. I agree.
    3. As already stated, section 35 is placed in Part III of the Limitation Act, not in Part II: see para 22 above. It is to be observed that the “open door” approach to limitation, which it is suggested section 35(3) permits, would be contrary to the careful and nuanced approach to be found elsewhere in the Limitation Act to the extension or exclusion of the ordinary limitation periods in Part I (by sections 32A and section 33 for example). Had Parliament intended to create such an exception to the protection that the Limitation Act provides for the benefit of a party who might otherwise have a “cause of action hanging over him like a sword of Damocles, for an indefinite period” per Lord Scott of Foscote in Haward v Fawcetts (a firm) [2006] 1W.L.R. 682, at para 32, in my view this would have required very clear words; and it cannot sensibly be said that Parliament provided them here. I also do not accept that the problems to which the prosecution of stale claims can give rise can be catered for by the use of the court’s case management powers: indeed it might be thought the use of those powers as a control mechanism would be contrary to the legislature’s intention in creating such a wide exception in the first place.
    4. Observations made in Lloyds Bank plc v Wojcik and anor, unreported, 19th December 1997 (Court of Appeal), and in JFS (UK) Ltd v Dwr Cymru Cyf [1999] 1 WLR 231 do in my opinion provide some support for the claimants’ position. These were ‘amendment’ cases, where the plaintiff’s original action was issued before the limitation period for the proposed counterclaim had expired; thus the point at issue in this appeal did not directly arise.
    5. In Lloyds Bank plc v Wojcik however, Evans LJ, giving the judgment of the court, said this about a defence and counterclaim in an originally served pleading:
“It is clear in our judgment that a set-off and counterclaim may be made in that pleading, even though the cause of action is time-barred when the pleading is served, provided that it was not time barred when the action was commenced by issue of the writ or summons (section 35 subsections (1) and (3)” (emphasis added): see page 12 of the transcript
  1. Similar observations were made in JFS v Dwr Cymru Cyf at page 236E by Nourse LJ in a judgment with which Evans LJ and Ward LJ agreed, where it was said that section 35(1)(b) enabled a defendant who included a counterclaim in his original defence to overcome any limitation objection which would otherwise have arisen between the date of the writ and the date of the defence.
  2. Though the point does not arise for determination on this appeal, as those cases also make clear, where a party wishes to amend to add “an original set-off and counterclaim” as defined by section 35(3) after the expiry of the applicable limitation period, the amendment is not subject to the special restrictions in section 35(4) and (5), and CPR 17.4, though permission to amend is still required in the usual way: see Lloyds Bank plc v Wojcik at pages 11 and 12 of the transcript and JFS v Dwr Cymru Cyf at 235F. See further, CPR 17.1(2)(b) and CPR 20.4(2)(b). If permission to amend is then granted, the claim added by amendment gets the benefit of relation back to the date of the (claimant’s) original claim: see Law Society v Shah and ors (No 2) per Norris J at para 15, but no greater benefit.
  3. Finally, it is of some note, as Ms Mulcahy points out, that the construction argument advanced by the defendants in this appeal did not feature in Aspect Contracts (Asbestos) Ltd v Higgins Construction plc [2015] UKSC 38; [2015] 1 WLR 2961. This was heavily contested commercial litigation which had limitation issues at the heart of it; yet its underlying premise was that the primary limitation periods applied to an original counterclaim; in consequence, it was held that the defendant’s counterclaim for the unpaid balance of an arbitration award (on the facts, clearly an original counterclaim within the meaning of section 35(3)) was time-barred: see paras 26, 27, and 33 of the judgment of Lord Mance JSC, with whom Lord Wilson, Lord Sumption, Lord Reed and Lord Toulson JJSC, agreed.
  4. For the reasons given, I would dismiss this appeal.”

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