Limitation In Professional Negligence - Not The 'Real World'?

In an interesting judgment last week, a High Court judge made

clear how difficult it can be to determine when damage is suffered

for the purpose of limitation rules in professional negligence

claims.

After reviewing a large number of House of Lords and Court of

Appeal authorities in this area he found that they did not provide

any "easy answers" for a first instance judge responsible

for applying them.

He decided that a claim in respect of a £90m capital gains

tax reinvestment relief scheme was statute barred but confessed

that this outcome ran contrary to his first impression when looking

at the case.

Facts

April 1998

Mr B, following advice from his accountants, E&Y, subscribed

£90 million (from the proceeds of sale of his electronics

business) for shares in a recently incorporated Luxembourg

registered company, Pegasus, which intended subsequently to acquire

other qualifying businesses to make good Mr B's claim for

reinvestment relief.

October 2002

Pegasus discovered that its base cost for the businesses which

it had acquired was not what it had paid for them, but the original

base cost, meaning that a capital gains tax bill could be generated

even if the businesses were sold for less than Pegasus had paid for

them.

November 2005

(i.e. more than 6 years after Mr B acquired the shares in

Pegasus) both Mr B and Pegasus commenced proceedings against

E&Y. The claim by Pegasus was dismissed on factual grounds.

Decision

The judge decided that what Mr B ought to have acquired, instead

of shares in Pegasus, was the parent company of a group of

subsidiaries which would have satisfied the criteria for a claim

for reinvestment relief. Once he had acquired Pegasus as a stand

alone company, it was too late to put the requisite structure in

place.

Accordingly, Mr B suffered loss as soon as he acquired the

shares in Pegasus in April 1998 and it did not matter that the

shares in Pegasus may have been worth exactly the £90 million

he paid for them immediately after he acquired them.

The result was that Mr B's claim in professional negligence

was statute barred and it had already been accepted that his claim

in contract against E&Y fell foul of the contractual limitation

provisions.

Comment

Whilst this decision will certainly be welcomed by professional

indemnity insurers, it serves to highlight the difficulties for

both claimants and defendants in accurately predicting the outcome

of any dispute on limitation.

The judge was clearly struck by the contrast...