Limitation periods in fraud claims: Court of Appeal clarification

Introduction

The Court of Appeal (“CA”) has recently considered the application of s.32(1)(a) of the Limitation Act 1980 (“LA 1980”) which provides that where an action is based on the fraud of a defendant the limitation period does not begin to run until the claimant has discovered, or could with reasonable diligence have discovered, the fraud. This means that in a claim based on the tort of deceit, where the limitation period is 6 years, the claimant has 6 years from discovery of the fraud, or from when the fraud could have been discovered with reasonable diligence, to commence a claim.

The CA judgment clarifies the operation of s.32(1)(a) in somewhat unusual circumstances, specifically, where the question of limitation arises following a trial and after the court has made findings of fact.  The judgment makes clear that ‘the fraud’ that is to be considered (for limitation purposes) is the fraud as determined by the judge, and not as originally pleaded by the claimant. Further, the CA held that where the fraud comprises two lies, the first of which is barred by limitation, the claimant can bring a claim based on the second lie if it constitutes a second cause of action and the limitation period for that action has not yet expired.

Factual background and the timeline of events

The factual background is not straightforward, containing several twists and turns along the way, which is indicative of the nature of the fraud found by the judge to have been committed by Mr Salfiti (the third defendant). However, simply put, the claim concerned the ownership of commercial property (the “Property”) and the arrangements surrounding its purchase.  

At first instance, the County Court made the following findings of fact, which were subsequently upheld by the High Court:

• The claimant, Mr Seedo, engaged Mr Salfiti as his solicitor in respect of a new property investment.
• Mr Salfiti proposed to Mr Seedo that they acquire the Property as a joint venture and, ultimately, they agreed to each contribute 50% of the costs and share rental income and profit on sale equally. This was all found by the judge to be a lie told by Mr Salfiti to Mr Seedo.
• In June 2004, Mr Salfiti attended an auction and made a successful bid for the Property.
• Mr Seedo transferred the sum of £69,500 to Mr Salfiti’s client account in respect of the Property. The judge found that those funds were held on trust for the purposes for which they had been requested and paid.
• Mr Salfiti then made arrangements with Mr El Gamal (the first defendant) that were wholly inconsistent with the above arrangements.
• Between June and July 2004, Mr Salfiti approached Mr El Gamal and requested that he purchase the Property on the basis that Mr Salfiti had paid the deposit but did not have funds to complete.  Mr Salfiti told Mr El Gamal that he would lend him £69,500 (which was Mr Seedo’s money) until the Property was resold, with Mr El Gamal funding the balance of the acquisition. At that time, Mr El Gamal was unaware of the existence or involvement of Mr Seedo. Mr El Gamal understood that he would solely own the Property, subject to an obligation to repay £69,500 to Mr Salfiti.
• In August 2004, completion occurred in the name of Mr El Gamal, with £69,500 paid for by Mr Seedo, another £69,500 paid for by Mr El Gamal and the balance paid from a mortgage taken by Mr El Gamal. At the same time, a Deed of Trust was executed which recorded Mr El Gamal as the trustee and, notably, Mr Seedo as the beneficiary.
• In 2006, relations between Mr Salfiti and Mr El Gamal soured.
• In August 2009, at the instigation of Mr Salfiti, his law firm (Salfiti LLP) sent a letter before action to Mr El Gamal purporting to be on behalf of Mr Seedo (which was found by the judge to be untrue) alleging breach of trust in respect of the Property and demanding payment of Mr Seedo’s share of the profits.
• In September 2009, Mr El Gamal replied to the letter before action.
• Between July and September 2015 Mr El Gamal sold the Property to his company El Gamal and Co Ltd (“EGC”, the second defendant).
• In May 2016, Mr Salfiti issued proceedings in the name of Mr Seedo against Mr El Gamal and EGC. However, Mr Seedo was unaware of the claim at that point.
• In November 2016, Mr Seedo learnt of the claim and, for the first time, he discovered that the Property had been placed in Mr El Gamal’s name. Mr Seedo took over conduct of the claim, adding  Mr Salfiti as a defendant.

The lower courts’ judgments

At first instance, the County Court determined that the Property was held first by Mr El Gamal, and then by EGC, on trust for themselves (respectively) and Mr Seedo, in equal shares. The County Court ordered various accounts against Mr El Gamal and EGC.

Unsurprisingly, Mr El Gamal and EGC claimed an indemnity from, or contribution against, Mr Salfiti, claiming fraudulent misrepresentation as well as breach of contractual and tortious duties under the retainer.

The County Court upheld Mr El Gamal and EGC’s claims and ordered Mr Salfiti to indemnify them against Mr Seedo’s claims and their own costs. The County Court rejected a submission by Mr Salfiti that the claims against him by Mr El Gamal and EGC were time barred because Mr El Gamal had not become aware of Mr Salfiti’s fraud until Mr Seedo had taken over the proceedings in 2016, which was less than six years before Mr El Gamal brought his claim. The County Court ruled that the very steps taken by Mr Salfiti to conceal the fraud meant that, with reasonable diligence, Mr El Gamal could not have discovered before 2016 that he had a good claim against Mr Salfiti.

Mr Salfiti appealed to the High Court on various grounds, including the limitation issue, and that appeal was dismissed on all grounds. Mr Salfiti subsequently appealed to the CA solely on the question of limitation.

The issues before the Court of Appeal

The appeal raised two questions of general interest on limitation in deceit claims:

First issue: Does the fraud mean the fraud as formulated by the claimant in its pleading, or the fraud as found by the judge after a trial? Notably, the parties’ legal representatives agreed that for the purposes of s.32(1) LA 1980 it was what the judge had ultimately decided that was relevant.  However, the issue was nevertheless considered by the CA as a point of general importance.

Second issue:  Where the defendant has deceived the claimant into entering into a transaction by telling more than one lie, what happens if the claimant discovers that one lie is false but does not bring a claim, and then some years later discovers that the second lie is false? Is the claim barred by limitation 6 years after discovery of the first lie, or could an action be brought based on the second lie up to 6 years after discovery of that lie?

The Court of Appeal’s judgment

The first issue

The CA highlighted that it is well established that s.32(1)(a) of the LA 1980 only applies where fraud is a necessary allegation to establish the cause of action, and it does not apply to any action in which the defendant is alleged to have acted fraudulently. Accordingly, in this case, s.32(1)(a) only applied to the claim based on fraudulent misrepresentation, and not the claims in contract and negligence.

The CA then considered the question of how to assess when the claimant has discovered, or could with reasonable diligence have discovered, the fraud, including by reference to the leading case on when time starts running under s.32(1), the Supreme Court’s judgment in Test Claimants in the FII Group Litigation v HMRC [2020] UKSC 47 (“FII”). Having considered those authorities, the CA held that it was established that in a fraud case, time starts to run “when the claimant has discovered enough to plead their case”. 

The next question addressed by the CA was what is “the fraud” which the claimant needs to have discovered or could have discovered. Contrary to the judgment under appeal of Falk J (as she then was), the CA said that there is nothing in the authorities which requires the court to confine its attention to the pleaded case when limitation is raised as a defence at trial and addressed after the judge has ruled on the merits. In most cases, the claim as found by the court will reflect the claimant’s pleaded allegations, but it is possible that where the pleading contains allegations that are not pursued or turn out to be unfounded, the judge may nevertheless find that there has been a fraud. In those circumstances, it would be wrong and, indeed, a distraction, to ask when the claimant discovered allegations which in the end went nowhere. The relevant question is when the claimant discovered (or could have discovered) the essential facts of the fraud found proved by the court. 

In the present case, “the fraud” found by the judge was: (i) that Mr Salfiti had duped Mr El Gamal into the transaction by agreeing that he would be the sole owner; and (ii) the fraudulent misrepresentation that Mr Salfiti would lend funds to Mr El Gamal.

The CA held, without difficulty, that Mr El Gamal discovered the fraud in 2009 via the exchange of correspondence with Mr Salfiti. The letters were enough to show Mr El Gamal that rather than being a sole owner of the Property as he had presumed, it was alleged that he owned half of the Property with Mr Seedo. The CA regarded it as irrelevant that at that stage (in 2009) Mr El Gamal may not have discovered enough to know whether the allegation that he was a trustee was well founded or not. What was clear was that he was being threatened with an action for breach of trust and that, if that was correct, he must have been misled by Mr Salfiti into buying the Property on a false premise. Given this ruling, it was not necessary for the CA to consider an alternative case of what Mr Gamal could have discovered with reasonable diligence.

Conversely, the CA ruled that the 2009 correspondence did not alert Mr El Gamal to the fact that Mr Salfiti had also lied about the source of the £69,500; and an issue arose as to the relevance of the discovery of that second lie for limitation purposes (discussed below). 

The second issue

The CA concluded that Mr Salfiti deceived Mr El Gamal by telling him two lies to persuade him to purchase the Property:

1. Mr Salfiti told Mr El Gamal that he would be the sole owner while putting in place the Deed of Trust under which Mr El Gamal would only have a 50% interest. As noted above, this lie was discovered in 2009 by Mr El Gamal, which was more than 6 years before the claim was commenced.
2. Mr Salfiti told Mr El Gamal that the £69,500 would be a loan from himself which Mr El Gamal could repay, whereas those funds belonged to Mr Seedo. The CA held that that lie was not discovered until (and could not reasonably have been discovered until) 2016 when Mr Seedo took over the claim, which was less than 6 years before Mr El Gamal commenced the claim.

The CA considered how s.32(1)(a) operates when the second lie is discovered within the limitation period. The CA concluded that the relevant question is whether the second lie gives rise to a different cause of action from the first lie.

Limitation operates by barring particular causes of action. It is not uncommon for different causes of action to have different time limits even if based on the same underlying facts. The relevant consideration is whether the two lies are “part of the same overall deceit” and, if so, then a claimant could not have another 6 years to bring, in essence, a claim for the same deceit. Both lies, although different in detail, are designed to conceal the truth.

The CA concluded that when Mr Salfiti told Mr El Gamal that the £69,500 was a loan from him that could in due course be repaid, that was part of the same deceit as agreeing with Mr El Gamal that he would be the sole owner of the Property. The CA described Mr Salfiti’s deceit as a “package of related lies” designed to entice Mr El Gamal to complete the purchase of the Property and to conceal Mr Seedo’s involvement in the transaction. 

The CA concluded that time started running in 2009 and the claim for the tort of deceit was barred by limitation in 2015.

Comment

The judgment arises from specific facts where the judge had already made findings at trial. In practice, it is more usual in a fraud claim for the question of limitation to arise before trial in an application for summary judgment or strike out. The judgment provides useful clarification on the application of s.32(1)(a) for fraud claims where findings of fact have already been made by the judge and where multiple lies have been told to orchestrate the fraud. 

Where multiple lies have been told, a claimant may not necessarily get the benefit of multiple limitation periods linked to when each lie was discovered or could reasonably have been discovered. Rather, if the lies do not constitute separate causes of action and they are part of the same overall deceit, then the limitation period will expire when the first lie was discovered or could have been discovered. This highlights the need for potential claimants in a fraud claim to assess expeditiously any suspicions of fraud at an early stage of any matter to avoid the expiry of the limitation period.

A copy of the judgment is available here: Seedo v El Gamal [2023] EWCA Civ 330