Haward v Fawcetts [2006] UKHL 9

Limitation – Date of ‘knowledge’ for purposes of Section 14A, Limitation Act 1980

No matter how one tries to dress it up, limitation is not a scintillating subject. However, for all litigators, it is a subject that simply must be understood. Solicitors who act for claimants must commence their client’s action within the limitation period. If they fail to do so, then a negligence claim is likely to be brought against them. Conversely, solicitors who act for defendants must also be alert to any limitation arguments that their clients may have. Limitation is a fundamental risk awareness issue for litigators and this is why Haward v Fawcetts is so important.

It is the first time that the House of Lords has opined on Section 14A, Limitation Act 1980. This section was introduced into the Limitation Act by the Latent Damage Act 1986 and it was introduced to solve a problem. The problem was this: Pirelli General Cable Works Limited v Oscar Faber & Partners [1983] 2 AC 1. The case is well known but the facts bear repetition. A chimney had been built in 1969. Damage occurred to the chimney in 1972. But the damage was not discovered until 1977. A writ was issued in 1978. The 6-year contractual limitation period had expired in 1975 at the latest. But what of the 6-year limitation period in tort? What indeed. The period starts when loss is suffered and the House of Lords said that this was in 1972 even though (and get this) the claimant did not know it had suffered loss until 1977. Accordingly, the writ had been issued outside the limitation period. This was a problem. Pirelli showed that it was possible for the limitation period to expire even before the Claimant knew he or she had a claim.

Hence, the Latent Damage Act 1986 (which introduced section 14A into the Limitation Act 1980). This solved the problem by introducing a new 3-year limitation period for claims in tort. The trigger for this new limitation period was ‘knowledge’. As soon as a claimant had the relevant knowledge, they had three years in which to bring a claim. However, as is the way with law, one problem was replaced with another one. What constitutes knowledge? When does a claimant know enough for the 3-year period to be triggered? These were the issues considered in Haward v Fawcetts.

The facts

Fawcetts are a firm of accountants. Mr Haward was their client. Mr Haward wanted to buy Kings Stag Engineering Limited (subsequently renamed Haward Agriculture Limited). Mr Haward asked Fawcetts for advice. Fawcetts provided it. On 9 December 1994, and in reliance upon Fawcetts’ advice, Mr Haward directly or indirectly invested £160,000 in the company. The company lost money. Mr Haward invested a further £431,000 in 1995, £102,985 in 1996, £509,525 in 1997 and £208,950 in 1998. Mr Haward lost his money.

Mr Haward commenced litigation against Fawcetts on 6th December 2001. He accepted that the 1994 and 1995 investments fell outside the 6-year limitation periods in both contract and tort. The question that was posed to the House of Lords, therefore, was whether they fell within the 3-year limitation period provided by Section 14A. If Mr Haward did not have the requisite ‘knowledge’ prior to 6th December 1998, then he was within the limitation period; if he did, then he was scuppered.

Section 14a

Section 14A applies to any action in negligence, other than personal injury claims. It creates a 3-year limitation period, the starting date for which is:

“…the earliest date on which the plaintiff … had both the knowledge required for bringing an action for damages in respect of the relevant damage and a right to bring such an action.” Section 14A(5).

It sounds so simple, doesn’t it? But then the section goes on to explain what is meant by ‘knowledge required for bringing an action’. It means:

“knowledge of the material facts about the damage in respect of which damages are claimed.” Section 14A(6)(a).

Helpfully (or confusingly, depending on your point of view), the section then tells us what ‘material facts about the damage’ means:

“… facts about the damage as would lead a reasonable person who had suffered such damage to consider it sufficiently serious to justify his instituting proceedings for damages against a defendant who did not dispute liability and was able to satisfy a judgment.” Section 14A(7).

In other words, you’ve suffered damage at the hands of Mr X. If you knew Mr X had money and if you knew he would not defend an action, would a reasonable person in your position sue him? Put aside all human sentiment for a moment. This is not about forgiveness or mercy. It is about fact. Do you know enough to sue a defendant who will not defend himself? If the answer is ‘yes’, then you have knowledge of the material facts about the damage. If the answer is ‘no’, then you don’t.

So that’s ‘knowledge of the material facts about the damage’. In addition, you need to have knowledge of certain other facts. For example, fairly obviously, you need to know the identity of the defendant. However, the key one for present purposes is the following:

“[Knowledge] that the damage was attributable in whole or in part to the act or omission which is alleged to constitute negligence.” Section 14A(8)(a).

Let’s go back to ‘knowledge of the material facts about the damage.’ In simplistic terms, this means: I know that I have been damaged. Section 14A(8)(a) means: I know whose actions have caused my damage. (Actually, this analysis is far too simplistic and does not tally absolutely with Lord Mance’s analysis, but it is sufficient for current purposes.) It is the combination of the two that triggers the start date. With one caveat:

“Knowledge that any acts or omissions did or did not, as a matter of law involve negligence is irrelevant…” Section 14A(9).

So, I need to know who has damaged me. Let’s call them Mr Q. I need to know that Mr Q’s actions have (in whole or in part) damaged me, but I do not need to know that Mr Q has been negligent in damaging me. This is a subtle distinction and it is this distinction which exercised the minds of their Lordships.

The arguments

Fawcetts’ argument can be simplified as follows. By the crucial date of 6 December 1998:

• Mr Haward knew that he had suffered damage. His company was losing money hand over fist.
• Mr Haward knew Fawcetts may have had a part to play in causing that damage. They had, after all, advised on the original purchase.
• This was all he needed to know to trigger the 3-year limitation period. He may not have known that Fawcetts were (allegedly) negligent, but he didn’t need to know that.
• Therefore, he was outside the limitation period.

Mr Haward’s argument can be similarly simplified as follows. By 6th December 1998:

• Mr Haward knew that he had suffered damage.
• Mr Haward did not know what had caused that damage. It could have been any number of factors (for example, the effect of BSE on the farming economy).
• Section 14A(8)(a) requires him to know, in effect, that the damage is ‘attributable’ to Fawcetts. He did not know that until May 1999, when he was advised to that effect by his solicitor.
• Therefore, he was inside the limitation period.

The Court of Appeal

The Court of Appeal accepted Mr Haward’s argument. They concentrated on the word ‘attributable’ and they decided that Mr Haward did not know that the damage was ‘attributable’ to Fawcetts until he was told this by his solicitor in May 1999. Accordingly, Mr Haward was within the limitation period.

The Court of Appeal’s decision did not receive much attention in the legal press, but its implications were vast. It meant that the 3-year limitation period would not be triggered until a claimant knew that the damage was ‘attributable to’ (in effect, ‘caused by’) the potential defendant. For Mr Haward, this was in May 1999. In Haward v Fawcetts, the outcome was not obviously unjust. There is very little gap between December 1998 and May 1999. But what if Mr Haward was not informed of Fawcetts’ culpability until 2000, or 2001, or 2006? The logic of the Court of Appeal’s decision was that the 3-year limitation period would not start running until then. Accordingly, the decision of the Court of Appeal had the potential to extend the 3-year limitation period by many years, (subject to the 15-year “longstop” period).

The House of Lords decision

Their Lordships agreed with the Court of Appeal that the key issue was as follows: prior to 6 December 1998, did Mr Haward know that his damage (i.e. the investment in 1994 and 1995) was ‘attributable in whole or in part’ to the acts or omissions of Fawcetts? This is a relatively simple question. It revolves entirely around the date of 6th December 1998. Their Lordships did not need to work out precisely when Mr Haward first acquired this knowledge. They merely had to say whether it had been acquired before or after 6 December 1998.

However, contained within this straightforward question, was a much more difficult issue: what precisely did Mr Haward need to know in order to have sufficient knowledge that his damage was attributable to Fawcetts? Their answer to this question would be of general application. What test would they, therefore, lay down? What formula would they stipulate? How would they define ‘knowledge’?

Needless to say, their Lordships did not answer these questions as unambiguously as one would like. All five Lords handed down judgments and, although they all agreed, they did so in subtly different ways. The following analysis, therefore, is an interpretation of their judgments rather than a regurgitation.

In our opinion, there were two main tests proposed by the Lords, both of which have an admirable history in caselaw:

The essence test

• This was expressed most clearly by Lord Scott: “The requisite knowledge is knowledge of the facts constituting the essence of the complaint of the negligence.” (Paragraph 49). This is a test that works retrospectively. You look at the allegations of negligence in the Statement of Claim and establish what the factual essence of those allegations is. This ‘factual essence’ is the matrix of facts that suggests that the damage was caused by the defendant. You then work backwards to discover when the claimant first knew of that factual essence.
• According to Lord Scott, the essence of the claim against Fawcetts was “that Fawcetts … did not give [Mr Haward] the advice that the true state of the company warranted and that, if given, would have warned [him] against a disastrous investment of [his] money.” (Paragraph 50). By 6 December 1998, Mr Haward knew that he had been given advice by Fawcetts and he knew that the company was losing money. These were the facts that constituted the essence of the complaint. Because Mr Haward knew these facts prior to 6th December 1998, he was outside the limitation period.

The investigations test

• This was expressed most clearly by Lord Nicholls. “Time did not start to run against Mr Haward until he knew enough for it to be reasonable to embark on preliminary investigations into this possibility.” (Paragraph 20, and also 23). It was also favoured by Lord Mance (paragraph 128). This is a practical test. You start with the act of negligence and then work forward until you reach the point when the claimant knew enough to commence investigations.
• As Lord Nicholls pointed out, there are some cases where the advice is self-evidently negligent. However, that was not the case with Fawcetts’ advice. “Something more was needed to put Mr Haward on inquiry.” (Paragraph 21). Lord Nicholls did not say what this ‘something more’ was. However, he concluded: “the disparity between [Fawcetts’] advice and the company’s disastrous losses stared Mr Haward in the face long before December 1998.” (Paragraph 24.) Accordingly, Mr Haward was outside the limitation period.

Lord Brown, in reaching his decision, combined the two tests. “What the claimant must know to set the time running is the essence of the act or omission to which his damage is attributable… But he surely knows enough … to realize that there is a real possibility of his damage having been caused by some flaw or inadequacy in his advisers’ investment advice, and enough therefore to start an investigation into that possibility.” (Paragraph 90).

In Haward v Fawcetts the application of these two tests led to the same result, namely that Mr Haward was outside the limitation period. It was not until May 1999 that he knew he could bring a claim against Fawcetts when he was advised to that effect by his solicitor. However, at some point prior to 6th December 1998:

• he knew enough to realize that there was a real possibility of his damage having been caused by some flaw or inadequacy in Fawcetts’ advice and he therefore knew enough to start an investigation into that possibility; and
• he knew the facts constituting the essence of the complaint of negligence.

In deciding these issues, Lord Walker (and possibly the other Lords, albeit less explicitly) was influenced by one obvious, but easily overlooked, fact: section 14A was introduced into the Limitation Act 1980 by the Latent Damage Act 1986. It was therefore “intended to cover cases of latent damage … and not cases of patent damage.” (Lord Walker, paragraph 66). In Haward v Fawcetts, the damage was patent and was known to Mr Haward. This was not, therefore, the sort of case in which one would expect section 14A to come to Mr Haward’s rescue. And, indeed, it did not.

Commentary

• The purpose of limitation periods is to create a balance between the rights of the claimant to bring legitimate claims and the rights of the defendant not to have to defend stale claims. This was a point made expressly by most of their Lordships. Their view was that the Court of Appeal decision had disturbed this balance by favouring the rights of the claimant too much. The House of Lords therefore restored the balance and, in that respect, the decision should be welcomed by defendants. It is the second time in recent years that the House of Lords has needed to correct the Court of Appeal in this way on limitation issues, the first being Cave v Robinson Jarvis & Rolfe [2002] UKHL 18, which dealt with section 32, Limitation Act 1980. It indicates a keenness by the House of Lords to ensure that the traditional balance between claimant and defendant is maintained.
• Haward v Fawcetts provides a useful exploration of section 14A by the House of Lords. It is essential reading for anyone who has a section 14A case. However, it is limited in its scope. It deals with a situation where the damage is patent, but where the claimant did not know that the defendant was at fault. The more common situation with section 14A, however, is likely to be where the damage is latent and the question is: when did the claimant first know of the damage? Haward v Fawcetts does not have much to say on that issue.
• Where it does apply, the test for ‘knowledge’ is now fairly clear. As explained above, there appear to be two tests: the investigation test and the essence test. In most cases, the application of these two tests will result in the same conclusion (as was the case in Haward v Fawcetts). However, there will be situations when the two tests point towards different conclusions. It is unclear what the court will do in situations such as that. They will presumably use whichever test seems most suited to them to create a just and reasonable solution.
• One possible example of this problem is as follows. Two of the Lords, Nicholls and Mance, referred to an article by Janet O’Sullivan called ‘Limitation, Latent Damage and Solicitors Negligence’, in which she posed “a penetrating question”. In Haward the damage arose from positive advice given by Fawcetts. What happens, she asked, when the damage arises from an adviser’s failure to do something. And what happens when the claimant does not know that the adviser had an obligation to do that something. How then can the claimant know that the damage is attributable to the adviser? Because Ms O’Sullivan’s example differed from the facts in Haward, the Lords did not provide an answer. It therefore remains an open question. However, it is a question where the answers to the two tests may well diverge. A defendant may know enough to investigate well in advance of the date when he knows the essence of the facts.
• Haward v Fawcetts was decided on the basis of Mr Haward’s actual knowledge. Section 14A, however, also allows a defendant to rely upon the claimant’s constructive knowledge. This was not argued in Haward for procedural reasons, but their Lordships hinted that it would have been an easier case to decide if constructive knowledge had been argued. This is not, however, necessarily, correct. We do not need to consider constructive knowledge in this article, but its definition in section 14A is far from straightforward. Because of the interpretation placed upon actual knowledge by the Lords, it is far from certain that the definition of constructive knowledge adds anything.
• There is a very obvious risk management issue here for all litigators. Make sure that you issue proceedings in plenty of time. With the arrival of protocols, litigators are now expected to use litigation as a last resort. Jaw jaw, rather than war war. It is remarkably easy, therefore, to overlook the fact that a limitation period is approaching. It is essential that all litigators identify the relevant limitation period, note this prominently on the file and utilise computerised diary and reminder systems to avoid this risk. Furthermore, if a limitation period is approaching, even on a dormant file, the solicitor should obtain his client’s express instructions as to whether he wants to proceed or not. There is nothing worse than a long-lost client reappearing with eagerness in their eyes, just one week after the expiry of the limitation period.
• Finally, in an ideal world, you do not want to be relying on section 14A at all. If there is a contract, always issue within 6 years of breach. If there is no contract, always issue within 6 years of loss. That way you avoid any risk of limitation problems. If you have to rely on section 14A, though, get the Claim Form in quickly. It is possible that your client obtained the requisite knowledge well before he first approached you as solicitor. As Haward v Fawcetts shows, it is dangerous to rely on your assessment of the date of knowledge. Any delay, therefore, is potentially fatal.

This case first appeared in the Solicitors' risk awareness bulletin in November 2006. To view the full publication please click here.

If you have problems opening or printing the pdf file above, please click here for help.