Limitation: just what knowledge must a claimant have before time starts running?

"Knowledge is power". But (if Goodfellas is to be believed) "knowing too much" can have devastating consequences. Whichever way we look at it, acquiring knowledge has consequences; some result in positive outcomes, others in concrete shoes.

When looking at the Latent Damage Act 1986, knowledge is the trigger which starts the limitation period running; from the 'date of knowledge', an aggrieved party has three years within which to bring his claim. But exactly what 'knowledge' does our aggrieved party need to have in order to start the time running? This article attempts to put the reader in the know.

Limitation summarised

There is a time limit within which claims must be pursued through the English Courts. The policy reason behind imposing such a limit is that, with time, memories fade and evidence becomes harder to locate, thereby rendering the prospect of a fair trial increasingly unlikely.

The general rule for a claim in negligence is that parties have six years from the date on which they suffer loss (which we will simply refer to as "the date of loss") to bring their claim. If they do not do so, their remedy is lost. Pretty simple so far.

Now it gets tricky. What if the aggrieved party does not actually know he has suffered any damage on the date of loss, but actually finds this out years later? For example, I may have bought a house in 1995 in reliance upon a favourable survey, but I only find out that the house has problems - which the survey ought to have highlighted - when carrying out renovations in 2004. In these circumstances, the six-year period has expired (the date of loss is 1995 - when I committed to buying the defective house). Is it right for me to be denied the opportunity to bring any sort of claim when I had no way of knowing until 2004 that there was even a problem?

To overcome this dilemma, the law (by virtue of the Latent Damage Act 1986) allows me an additional period of three years to bring a claim in negligence against the surveyor. But the Act is less than clear and this has given rise to one very complicated (and much debated) issue: from when does the three-year period start?

This issue has most recently been debated by the Court of Appeal in the case of Haward and Others –v- Fawcetts and Another.

Haward – The Facts

In Haward, the claimants had bought a company in December 1994 allegedly in reliance upon their accountants' due diligence advice. Once acquired, the claimants found that the company was under-performing so they made various substantial investments into the company to keep it going. These investments were made at various stages between 1994 and 1998 and, again, they were allegedly made upon the defendant's advice (or in the absence of contrary advice). In mid-2000, the claimants drew a line under their losses and disposed of the company.

In December 2001, the claimants commenced legal proceedings against the defendant in respect of their losses, alleging that, had they been appropriately advised, they would (a) never have bought the company or (b) would have 'got out' earlier and avoided incurring all of the investment losses they suffered.

For the purposes of this claim, there were various 'dates of loss', each giving rise to its own six year period within which to claim. The first such date was the date of acquisition of the company in December 1994, with a new date of loss each time that subsequent investments were made throughout 1994, 1995, 1996, 1997 and 1998.

It can be seen that, by the time the legal proceedings had been issued, the six year period to claim in respect of the acquisition losses in 1994 had passed, as had the periods in respect of all investments made up until December 1995 (December 1995 being six years prior to the start of the legal claim). The Defendants therefore sought a determination from the Court that the parts of the claim relating to events prior to December 1995 should be struck out.

The Claimants relied upon the Latent Damage Act (now more correctly referred to as s.14A of the Limitation Act 1980) to give them their additional three year period within which to claim and they argued that they had only acquired the requisite knowledge to trigger that limitation period within the three years prior to commencing their proceedings (ie in or after December 1998). The issues to be determined by the Court were therefore (1) what knowledge is required to start the three-year period running?; and (2) did the Claimants really only acquire that knowledge after December 1998 or did they have the requisite knowledge before?

What knowledge is required?

Section 14A of the Limitation Act 1980 provides that the knowledge needed by the claimant before time will begin to run is:

1. Knowledge of the relevant facts about the loss suffered;
2. Knowledge that the loss is attributable 'in whole or in part' to the act or omission alleged to be negligent; and
3. Knowledge of the identity of the defendant.

Put simplistically, the three-year period will start to run as soon as the claimant becomes aware that the defendant's acts or omissions may have caused him to suffer a loss. It is important to note (indeed the Act expressly states) that the claimant does not need to know that the act or omission complained of is negligent in law to start the period running; typically, the above three factors will have been satisfied (and therefore the three year period will have started to run) long before the claimant's investigations conclude that negligence is involved.

Did the claimants have the knowledge?

In Haward, the judge at first instance held that the claimants had the requisite knowledge for the purposes of section 14A more than three years before proceedings were commenced. He held that (1) the Claimants knew well before December 1998 that the investments they had made into the Company (both on acquisition and subsequently) had become irretrievable losses; (2) that the Claimants were clearly aware at the time that they made the investments into the Company that they were doing so either on the defendant's express advice or in the absence of contrary advice; and (3) obviously the Claimants knew the Defendant's identity at all material times.

The only thing that the Judge accepted the Claimants may not have known more than three years prior to commencing proceedings was that the defendant had been negligent but, as stated above, this is irrelevant for the purposes of section 14A. Accordingly, the judge struck out all parts of the claim relating to losses alleged to have been suffered prior to December 1995. This amounted to approximately half of the total amount being claimed by the Claimants. The Claimants appealed.

Decision on Appeal

The Court of Appeal's analysis of the case focused on the meaning of the word "attributable" (as it appears at (ii) above). Lord Justice Jonathan Parker, giving the only full judgment, undertook a 24 page review of authorities on Section 14A and the requirement of "knowledge". Whilst his analysis is thorough, the reasoning behind his conclusion is, in parts, difficult to follow.

His conclusion was that the concept of attributability - linking the damage to the acts or omissions alleged to constitute negligence - has similarities with the concept of causation. Nevertheless, he accepted that the two were not the same (otherwise, he said, the word "causation" itself would have been used in the statute). He therefore confirmed that "attributable" means "capable of being attributed to", not "definitely caused by".

However, in spite of this confirmation, he went on to hold that, for time to start running under Section 14A, the Claimant must know precisely which act or omission was "causally relevant" to his loss. In other words, the Claimants' knowledge that their loss was caused by one of several possible factors was not enough to trigger the period; in order to start time running, the Claimants had to know exactly which one of those possible factors was to blame.

The Court of Appeal in Haward ruled that the Claimants did not know until May 1999 (ie within three years of starting proceedings) that the Defendant's acts or omissions were causally relevant to their losses. Effectively, it was not until Mr Haward was aware of the causal link between the Defendant's acts and his losses that the period began. The appeal was therefore allowed.

Implications of Haward

The Court of Appeal's decision in this case demonstrates the English Courts' general reluctance to allow purely technical arguments to defeat claims. However, in doing so, the authors believe that the Court has gone further than was intended when the Latent Damage Act was drafted.

When the Latent Damage Act was enacted in 1986, it was designed to address a specific problem, namely how to protect a claimant who could not reasonably discover his loss until well after the primary six-year period had expired. However, the interests of the Claimant had to be carefully balanced against the interests of the defendant who, without some form of protection, might have the cloud of potential litigation hanging ominously over them for a limitless period of time.

The additional 3-year period given by section 14A was therefore intended to strike the balance and allow the claimant - following the discovery of his loss - a short but reasonable additional period of time to investigate his potential claim, discover who precisely was to blame and commence legal proceedings if a case in negligence could be made out. Once the three years was up, the Claimant was deemed to have had his opportunity and the cloud over the Defendant was removed.

Haward seems to go against the principle of 'striking the balance' and tips the scales firmly in favour of claimants. It effectively says that a claimant must have concluded his investigations and identified his defendant before the three years will start. This seems to suggest that, despite the wording of the Latent Damage Act to the contrary, the claimant must effectively have knowledge of the defendant's negligence (or something extremely close to it) before time will begin to run. If this is correct, the three year period serves little more purpose than as a luxurious deadline within which to issue the Claim Form.

[NB: A petition is currently being put together to approach the House of Lords for a review of the Court of Appeal's decision.]

For further information, please contact Joe Bryant at [email protected] or on +44 (0)117 930 7827 or Rob Morris at [email protected] or on +44 (0)117 930 7822.