CASE AGAINST SOLICITORS WAS STATUTE BARRED: THE DANGERS OF MAKING ASSUMPTIONS IN RELATION TO LIMITATION PERIODS (AND WAITING SIX YEARS IN ANY EVENT)

In Elliott v Hattens Solicitors (a firm) [2021] EWCA Civ 720 the Court of Appeal found that an action against a firm of solicitors was statute barred.  The loss had occurred more than six years prior to the date of the issue of proceedings.  The case is a working example of the dangers of assuming that a limitation period runs from the date a loss becomes apparent.  Waiting six years to issue anything can, and in this case demonstrably did, lead to major difficulties.

“If negligence on the part of a solicitor served to reduce the market value of an asset, the claimant cannot, in my view, defer the expiry of the limitation period by pointing out that he was not intending to sell it.”

THE CASE

The defendant firm of solicitors admitted they were negligent in failing to properly advise in relation to a lease in 2011.

1. 1. The appellants, Hattens, are a firm of solicitors. In 2011, they were retained by the respondent, Mrs Kelly Elliott, to act for her in connection with a transaction pursuant to which her husband was to grant her a lease and she would grant an underlease to a Mr Jamie Malster. The lease and underlease were to be of premises in Stanley Road, Grays, Essex of which Mr Elliot was the freehold owner. As was explained to Hattens by estate agents acting for Mrs Elliott, the intention was that Mr Malster’s parents should guarantee his obligations under the underlease.

1. 1. In pursuance of their instructions, Hattens prepared a lease, underlease and rent deposit deed which were executed on 24 February 2012. The lease in Mrs Elliott’s favour was to last until 30 June 2014 and the underlease to Mr Malster was for a term expiring a little earlier in June 2014. The lease included covenants by Mrs Elliott as tenant to insure the premises against fire and to keep them in good repair and a provision entitling the landlord to forfeit whenever the tenant had not complied with any obligation in the lease. Covenants by Mrs Elliott to insure were also to be found in the underlease, while Mr Malster covenanted in the underlease to keep the property in repair as well as to pay the rent, subject to exceptions in respect of damage by “Insured Risks” unless payment of insurance money was withheld by reason of an act or default on Mr Malster’s part.

1. 1. By mistake, Hattens failed to name Mr Malster’s parents as parties to the underlease, and Mr Malster’s parents neither executed the underlease nor otherwise became guarantors. Further, Hattens did not advise Mrs Elliott to obtain insurance. In the circumstances, Hattens accept that they failed to exercise reasonable skill and care in drafting the documentation and advising Mrs Elliott.

1. 1. On 6 November 2012, there was a fire at the premises which effectively destroyed the buildings there. Mr Malster subsequently vacated the property without undertaking repairs. Mrs Elliott also lost rent.

1. 1. Mrs Elliott had not taken out any insurance. Her husband had, on his own account, but the insurer declined cover. Hattens’ defence asserts that this was “as a result of a breach of warranty whereby the freeholder warranted that all waste would be swept up at the end of each working day, deposited in metal receptacles with metal lids and removed from the premises at intervals not exceeding one week” and that the breach of warranty was “as a result of the failure of Mr Malster to implement a system of waste management that met the terms of the warranty (the terms of which he was aware and understood)”.

1. 1. The present proceedings, seeking damages for negligence, were issued by Mrs Elliott on 10 April 2018, more than six years after the lease and underlease were executed but less than six years after the fire. Hattens are said to have been negligent in essentially two ways: failing to ensure that Mr Malster’s parents entered into a guarantee and failing to advise Mrs Elliott of her insurance obligations under the lease and underlease. A schedule of loss and damage includes items relating to both (a) the costs of clearing the site and rebuilding and (b) loss of rent.

1. 1. Hattens pleaded in their defence that the claim was statute-barred. In the circumstances, an order was made for the trial of a preliminary issue, viz. “Whether the Claimant’s claim is barred by virtue of the Limitation Act 1980?” Directions were given for the preparation of an agreed statement of facts and exchange of witness statements in relation to facts which were not agreed. In the event, the parties agreed a statement of facts and neither side called any witnesses.

1. His Honour Judge Bailey (“the Judge”) heard the trial of the preliminary issue on 17 May 2019 and answered the question in the negative.

THE LIMITATION PERIOD AND NEGLIGENCE CLAIM AGAINST SOLICITORS

This judgment shows why a party can be surprised in relation to a negligence claim against solicitors.   The claimant can suffer a loss at the time of the negligence, but not be aware of it. The limitation period, however, runs from the date of the transaction and not from a later date when the client becomes aware of the loss.

1. 1. A claim in tort will normally become time-barred six years after the cause of action accrued. With the tort of negligence, damage is an essential ingredient of the cause of action. The availability of a limitation defence will thus depend on when the negligence first caused actionable damage. “[O]nce real damage – as distinct from purely minimal damage – is sustained the cause of action arises, even though greater loss may later eventuate from the negligence” (per Sir Murray Stuart-Smith in Khan v R.M. Falvey [2002] EWCA Civ 400, [2002] PNLR 28, at paragraph 11), and “A claimant cannot defeat the statute of limitations by claiming only in respect of damage which occurs within the limitation period, if he has suffered actual damage from the same wrongful acts outside that period” (per Sir Murray Stuart-Smith in Khan v R.M. Falvey, at paragraph 23).

1. 1. Negligence claims against solicitors often relate to transactions, on which the solicitors were instructed, which have turned out badly. In that context, a claimant may allege either that, but for the solicitors’ negligence, he would not have entered into the transaction at all (a “no transaction” case) or that, had it not been for the negligence, the transaction would have been a better one (a “flawed transaction” case). The Privy Council referred to the distinction between the two situations in Maharaj v Johnson [2015] UKPC 28, [2015] PNLR 27 (“Maharaj“). Lord Wilson (with whom Lady Hale, Lord Carnwath and Lord Hodge agreed) said in paragraph 19:

“[T]he central concept behind the ‘no transaction’ and the ‘flawed transaction’ cases is different. For in the latter the claimant does enter into a ‘flawed transaction’ in circumstances in which, in the absence of the defendant’s breach of duty, he would have entered into an analogous, but flawless, transaction. In the former, however, the claimant also enters into a transaction but in circumstances in which, in the absence of the defendant’s breach of duty, he would have entered into ‘no transaction’ at all. The difference in concept dictates a difference in the inquiry as to whether, and if so when, the claimant suffered actual or measurable damage. In the ‘flawed transaction’ case the inquiry is whether the value to the claimant of the flawed transaction was measurably less than what would have been the value to him of the flawless transaction. In the ‘no transaction’ case the inquiry is whether, and if so at what point, the transaction into which the claimant entered caused his financial position to be measurably worse than if he had not entered into it: see [Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627], at p.1631 (Lord Nicholls). The Nykredit case was a classic example of a ‘no transaction’ case in that the claimants, who had lent money on the security of a property which the defendant valuers had negligently overvalued for them, would have declined to make the loan if the valuation had not been deficient.”

THE DEFENDANT’S ARGUMENT ON APPEAL

1. 1. Mr Simon Goldstone, who appeared for Hattens, argued that Mrs Elliott suffered damage as soon as the lease and underlease were executed. She was immediately in a measurably less advantageous position than she should have been. Hattens’ negligence served to deprive her of certain of the benefits which she should have obtained from the transaction (in particular, the right to a guaranteed rental stream and a property that was insured) and so they were at once vulnerable to a tortious claim. Mrs Elliott’s loss was not purely contingent and the Judge was mistaken in attaching importance to whether she wished to assign. The package of rights which Mrs Elliott received was objectively less valuable and the cause of action therefore accrued regardless of her intentions as to assignment.

1. In contrast, Mr Crowley supported the Judge’s decision. There was, he submitted, no measurable loss before the fire. Every case has to be determined on its own facts and, here, Mrs Elliott did not suffer any actual loss or damage as a result of the absence of a guarantee until after Mr Malster had defaulted on his obligations and did not suffer any actual loss or damage as a result of Hattens’ failure to advise on insurance until after the fire. It had not been part of the purpose or object of the transactions to produce assignable leases, and there was no risk of Mrs Elliott’s husband forfeiting her lease on the strength of her failure to insure. Just as it can be seen from Shore that a claimant’s intentions can be relevant to whether actionable damage was suffered, so they can mean that there was no such damage. Alternatively, it was open to the Judge to find that loss was purely contingent up to the fire.

THE DEFENDANT’S SUCCESSFUL APPEAL

The Court of Appeal found that this was a flawed transaction case. The loss ran from the date of the transaction and the claimant’s action was statute barred.

1. 1. This is a “flawed transaction” case. Mrs Elliott would still have taken a lease of the Stanley Road premises and granted an underlease to Mr Malster if there had been no negligence. Had, however, Hattens not been negligent, Mr Malster’s parents would have guaranteed his obligations and, it is to be assumed, Mrs Elliott would have been warned of the need to insure and would have done so.

1. 1. The question then arises whether “the value to [Mrs Elliott] of the flawed transaction was measurably less than what would have been the value to [her] of the flawless transaction” (to adapt slightly words of Lord Wilson in Maharaj). On the face of it, the answer is obvious: apart from anything else, Mrs Elliott’s lease must have been less valuable because there was no guarantor in respect of the underlease she had granted and, for good measure, it was not within her power to remedy the deficiency without the cooperation of Mr Malster’s parents. While it would not have been possible to say how far, if at all, Mrs Elliott might have wished to call on a guarantee, there can be no doubt that, looking at matters objectively, what she received from the transaction was significantly inferior to what she should have received. The reversion to an underlease with the benefit of Mr Malster’s parents as guarantors would plainly have been of measurably greater value than that to the unguaranteed underlease which Hattens’ negligence led Mrs Elliott to grant. An expert could doubtless have put a figure on the difference.

1. 1. The present case does not resemble Sephton. As Longmore LJ noted in Axa, Sephton shows that “a contingent liability does not ‘of itself’ constitute ‘damage'”: there must be “something more”. Here, Hattens’ negligence did not cause Mrs Elliott to assume any liability: the position is rather that she obtained less advantageous rights. More importantly, perhaps, there was “something more”. The fact that the underlease had no guarantor affected property of Mrs Elliott, viz. her lease. Mrs Elliott was “disappointed (as against what [she] was entitled to expect) in an asset which [she acquired]” and “received less than [she] should have done” as “a party to a bilateral transaction” (to use words of Lords Walker and Hoffmann in Sephton).

1. 1. The Judge, however, drew attention to the fact that Mrs Elliott had not wished to assign her lease, and Mr Crowley argued that that fact was highly relevant. In this respect, he relied particularly on Shore. That decision, he argued, shows that what matters is value from the claimant’s point of view. In Shore, damage was held to have accrued because, regardless of whether the investment in the PFW scheme was objectively worth what was paid for it, it was inferior from Mr Shore’s point of view as what he wanted was a secure scheme. In Shore, focusing on the claimant’s intentions meant that damage was held to accrue earlier than might otherwise have been the case, but the same principle, Mr Crowley contended, can delay the accrual of a claim. In the present case, Mr Crowley submitted, Mrs Elliott did not wish to assign her lease and so the mere fact that the absence of a guarantee might have reduced its assignable value is unimportant. It was not, Mr Crowley said, part of the purpose or object of the transaction to produce an assignable lease.

1. 1. I cannot accept this argument. In the first place, the simple fact is that Mrs Elliott did not obtain the package of rights that she subjectively desired. As Mr Crowley accepted in submissions, she wanted to have the benefit of a guarantee from Mr Malster’s parents from the outset, but that was not provided. True it may be that she did not envisage assigning her lease, but it does not follow that she did not want the lease to be assignable or that it was not part of the purpose or object of the transaction to produce an assignable lease, let alone that she did not wish the underlease to be supported by a guarantee from Mr Malster’s parents.

1. 1. Secondly, Shore indicates that a claimant can potentially suffer relevant damage as soon as a flawed transaction is entered into even though the value of that transaction is not objectively lower than that of the intended transaction. Where, on the other hand, a flawed transaction is objectively less valuable from the start, it seems to me that the cause of action accrues at the outset. If negligence on the part of a solicitor served to reduce the market value of an asset, the claimant cannot, in my view, defer the expiry of the limitation period by pointing out that he was not intending to sell it. It is one thing to say that someone suffered damage because he did not get what he wanted regardless of whether what he got was objectively as valuable; it is another to say that someone who, looking at matters objectively, has sustained a financial loss has not yet suffered relevant damage and so could not bring a claim. In Sephton, Lord Walker thought the formulation “financially worse off” preferable to either “worse off” or “detriment” because “worse off” and “detriment” were “imprecise”: see paragraph 43. Where a claimant can be seen to be “financially worse off”, because an asset has a lower market value, relevant damage will, I think, have been suffered whatever the claimant was intending to do with the asset.

1. 1. In the circumstances, I am in no doubt that Hattens’ failure to ensure that Mr Malster’s parents were guarantors caused Mrs Elliott damage as soon as the lease and underlease were entered into and, hence, that her cause of action accrued at that point and is now statute-barred.

1. 1. I have considered whether the position is different as regards Hattens’ failure to advise Mrs Elliott to insure the premises. An argument to this effect would proceed on the basis that, until the fire, the deficiency could have been remedied easily. While Mrs Elliott’s failure to insure might theoretically have rendered her lease vulnerable to forfeiture, there was no real possibility of the landlord, her husband, seeking to take that course, nor any reason to believe that insurance would have cost more then than it would have done if taken out when the lease and underlease were first executed.

1. 1. However, Mr Crowley did not present his case on this basis. He did not suggest in his skeleton argument for the appeal that any distinction could be drawn between the absence of insurance advice and the want of guarantors. Nor, so far as I can see, did he put matters that way before the Judge and, although that hearing involved the trial of a preliminary issue rather than merely an application to strike out or for summary judgment, no evidence was adduced as to the unlikelihood of the right to forfeit being exercised or Mrs Elliott’s ability to solve the problem without incurring additional expense.

1. 1. In any event, what Mrs Elliott plainly wanted Hattens to achieve for her was a package comprising a lease and underlease which were fully effective. On Mrs Elliott’s case, however, Hattens’ failure to advise her of the need to insure put her in breach of her obligations under both the underlease and lease and provided a ground for forfeiting the latter. Mrs Elliott was thus exposed to a risk which, there being no evidence as to, for example, her relationship with her husband or the chances of his transferring the freehold, cannot be dismissed as negligible, the more so since Mrs Elliott stood to remain in ignorance of the relevant provisions of the lease and underlease. Further, it was foreseeable that, were an attempt to be made to forfeit the lease, Mrs Elliott would have to incur expense in connection with it even if she ultimately retained the lease.

1. 1. As Dyson LJ noted in Shore, cases such as Bell proceeded on the basis that “the possibility of actual financial harm … constitutes the loss”. In Knapp, Hobhouse LJ held that the plaintiffs “suffered loss as soon as they received an insurance contract which was not binding upon the insurers“, going on to observe that the Court could if necessary have put a monetary value on the loss “exclud[ing] the possibility at that time of remedying the deficiency because the plaintiffs were in fact unaware of it and their state of knowledge arose from the breach of duty”. In a similar way, a valuer asked to value Mrs Elliott’s lease as at the date of its grant on the footing that she would not be complying with her insurance obligations could be expected to arrive at a lower figure on that account.

1. 1. The upshot is that I do not think that the failure to give advice as to the need to insure falls to be treated any differently from the failure to ensure that Mr Malster’s parents became guarantors. I respectfully differ from the Judge and would hold Mrs Elliott’s claim to be statute-barred in its entirety.

1. I would allow the appeal.