APPLYING TO SUBSTITUTE A PARTY AFTER THE EXPIRY OF THE LIMITATION PERIOD: THE STATUTE AND THE RULES CONSIDERED
The rules relating to substituting a defendant after expiry of the limitation period are always a little intimidating. Particularly when trying to persuade a court to apply them. They were considered in detail in the judgment of Master Shuman in Powis Street Estates (No. 3) Ltd v Wallace LLP & Anor  EWHC 169.
The claimants brought proceedings for professional negligence against the second defendant property agents. Proceedings had been issued against a LLP. In fact the proper entity at the time of the events in question was that of a partnership. An application was made to amend the claim to be against the partnership.
I will set out the relevant rules and statue below. The Master summarised the principles.
“21. As to the discrete question of whether the court should permit a party to be substituted, the following questions need to be answered:
(1) Was the relevant limitation period current when the claim was issued?
(2) If yes, is the substitution “necessary” because:
(i) the original defendant was named by mistake; or
(ii) the claim cannot be maintained without joining the substitute party.
(3) If the substitution is necessary, should the court exercise its discretion to permit the amendment?
(4) If it is not necessary, the court has no discretion and must refuse permission.”
It was common ground that the limitation period was current when the proceedings were issued. The Master rejected the second defendant’s arguments that the claimant had not made a mistake.
I accept that the claimant sued the second defendant in the mistaken belief that it was the second defendant and not the partnership who provided the services that are complained of and that they failed to recognise that the services were provide by the partnership not the second defendant. This was a mistake falling within the meaning of section 35(6)(a) of the 1980 Act and CPR r.19.5(3)(a).
Mr Halpern QC in the alternative argued that if this was not a mistake of fact then it was a mistake of law which the court has power to correct under CPR r19.5(3)(b). In Insight v Kingston Smith (a firm) Leggatt J distilled the relevant principles at paragraph 96 and set out a two-part test that a party must satisfy,
“(1) claim made in the original action is not sustainable by or against the existing party; and (2) it is the same claim which will be carried on by or against the new party.”
I am not persuaded by Mr Halpern QC that the reasoning in Insight v Kingston Smith (a firm) does not apply with equal force to the facts before me. This is not a case where the claimant has argued that WS LLP issued the claim in the mistaken belief that the second defendant had taken over the liabilities of the partnership, rather they mistakenly believed that the second defendant had performed the services complained of. It cannot therefore be said that the cause of action described as breach of contract and/or negligence and/or breach of duty against the second defendant is the same as the cause of action against the partnership. It is the partnership who provided the services of which the claimant complains. It is flawed to categorise this as an error of law that falls within section 35(5)(b).
SHOULD THE COURT EXERCISE ITS DISCRETION?
The Master held that it would be unjust not to exercise his discretion on the facts of this case.
Should the discretion be exercised to permit substitution? It is important to bear in mind, as Leggatt J said in Insight v Kingston Smith (a firm) at paragraph 100, “the discretion must be exercised in accordance with the overriding objective of enabling the court to deal with cases justly.” The burden is on the claimant to satisfy the court that the discretion should be exercised in its favour.
Mr McPherson QC referred me to the facts of American Leisure Group Ltd v Olswang LLP  EWHC 629 (Ch) a decision of Master Bragge, upheld on appeal. In that case he held that the court had jurisdiction under CPR r19.5(3)(a) but then refused to exercise his discretion. What Mr McPherson has sought to do is to superimpose the facts of that case with those before me. He focuses on delay and prejudice both to the partners of the partnership and the second defendant. Although the same approach could be taken by the claimant, relying on Insight v Kingston Smith (a firm). What I am concerned with is applying the agreed legal principles to the facts of the case before me.
Mr McPherson is critical of delays pre-issue, issuing on the eve of the sixth anniversary of the execution of the Dagmar contract, delay in the pursuit of these proceedings and why it took a year for the application for substitution to be made. Mr Ross explains at some length in his witness statement dated 29 November 2019 the steps taken by WS LLP and from early 2019 Forsters and appends a detailed chronology. Whilst this case illustrates the inherent dangers in professional negligence claims being issued right ‘up to the wire’ in respect of the limitation period and matters could have been progressed more quickly, I am satisfied broadly with the explanations given by Mr Ross. Delay is of course a factor but not one that in this case militates against granting permission to substitute. I set out the salient timings below.
The preliminary notice of claim was sent to Cradick Retail on 11 February 2015 alleging an issue with the 132-136 plan. Stephen Cradick replied by email dated 10 March 2015 saying that the professional indemnity insurers had been put on notice and the footer in the email refers to the second defendant. The letter of claim dated 1 August 2017 has the subject heading in the email as “Cradick Retail LLP – Letter of Claim”. Whilst Kennedys say that they became aware of the issue of the status of the second defendant in or around November 2017 I have already accepted that the claimant was only made aware of this when it received the second defendant’s defence on 29 June 2018. The defence itself whilst reserving its position that the claim should be struck out goes on to plead fully to the claim.
On 6 August 2018 Kennedys admitted in open correspondence that the partnership had been negligent in respect of “the use of inaccurate plans”; which must relate to both the 132-136 plan and the 138-152 plan. An offer was made to settle that part of the claim in the sum of £125,000, that being the sum that the claimant had agreed to pay in respect of the Laxcon and Provenance litigation. This sum was paid on 3 May 2019.
On 5 June 2019 Kennedys proposed that Forsters serve a draft amended claim form and draft amended particulars of claim, “in order to determine whether any proposed amendments can be agreed by consent.” An order was agreed by consent for the draft amended statements of case to be served by 5 July 2019. On 18 July 2019 Kennedys stated, for the first time, that they objected to the substitution of the partnership. Forsters issued the application on 25 July 2019.
Mr McPherson QC also submits that the prejudice to both the partnership and the second defendant would be such that the court should not exercise its discretion. I note no prejudice was identified by Kennedys in its letter dated 18 July 2019 objecting to the substitution and indeed the first time it was raised was in Mr McDonald’s statement dated 4 November 2019. Having been taken through the correspondence at some length I do consider there is something in Mr Halpern’s observation that had there been serious prejudice Kennedys would have applied to strike out the claim at an early stage, possibly when the claim form was served or more likely when the particulars of claim were served.
Mr McDonald says the claim is pleaded with a value in excess of £5 million. The limit of indemnity insurance is £2 million for any one claim. He says that none of the former partners of the partnership are “especially wealthy individuals” and they would potentially face bankruptcy if the claim succeeded. He goes on to set out broad details about the finances of each of the former partners. There is also an observation that Brian Cradick, the brother of Stephen Cradick, despite them remaining in contact only became aware of the potential claim in Autumn 2017, a few weeks after the limitation period had expired. Mr McDonald also sets out the trading position of the second defendant; under a business transfer agreement it is obliged to indemnify the partnership. Mr Halpern makes the valid point that in the second defendant’s accounts for 31 December 2018, after the claim was intimated in February 2015, the members’ interests after profit was £925,483 and that they elected to draw £706,440, which could have been used to meet the indemnity. Businesses make choices and here the second defendant elected to distribute the members’ interests at a time when they knew that there was a claim and one that partly admitted breach.
Mr Halpern is critical of this prejudice. He submits that the prejudice is of their own making. Without any evidence to the contrary I am left to infer that the partners and the directors have elected to take out this level of insurance cover and to do so without any excess layer. That would seem imprudent. They also only elected to limit their liability when they incorporated the second defendant on 25 October 2013, starting to trade in place of the partnership in early 2014.
I also factor in the prejudice to the claimant if this substitution is not allowed. Whilst the claimant has a potential remedy against its previous legal advisers that is likely to be on the basis of a loss of chance and given the inherent difficulties that is likely to be less than the current claim against the second defendant or, if substituted, the partnership.
The partnership had known since 2015 of this claim. The partnership and the second defendant have the same legal team and insurers. They have been able to carry out the necessary investigations into the claim because a very full defence was served on behalf of the second defendant. The former partners have the benefit of an indemnity from the second defendant.
THE STATUTE AND THE RULES
“(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;
(3) Except as provided by section 33 of this Act or by rules of court, neither the High Court nor the county court shall allow a new claim within subsection (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.
“(2) The court may allow an amendment whose effect will be to add or substitute a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings.
(3) The court may allow an amendment to correct a mistake as to the name of a party, but only where the mistake was genuine and not one which would cause reasonable doubt as to the identity of the party in question”.
“(1) This rule applies to a change of parties after the end of a period of limitation under—”
(a) the Limitation Act 1980 …
(2) The court may add or substitute a party only if—
(a) the relevant limitation period(GL) was current when the proceedings were started; and
(b) the addition or substitution is necessary.
(3) The addition or substitution of a party is necessary only if the court is satisfied that—
(a) the new party is to be substituted for a party who was named in the claim form in mistake for the new party;
(b) the claim cannot properly be carried on by or against the original party unless the new party is added or substituted as claimant or defendant;
(c) the original party has died or had a bankruptcy order made against him and his interest or liability has passed to the new party.… “