A Tale Of Loss, Limitation And A Flawed Transaction: Why A Loss May Not Feel Like A Loss

• Published date: 01 June 2021
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Financial Services, Trials & Appeals & Compensation
• Law Firm: Reynolds Porter Chamberlain
• Author: Mr Peter Mansfield

A recent Court of Appeal decision, Elliott v Hattens [2021] Civ 720, has once again raised the vexed issue of when the limitation period starts to run in a flawed transaction case. Does it start running immediately or at some later date?

Transactions are meat and drink to solicitors. Whether they be house purchases, share sales or commercial agreements, this is what solicitors do. A flawed transaction is one which contains within it an error. Perhaps the house purchase is subject to a third party right, or the share sale is at risk of challenge from a liquidator or the commercial agreement neglects to include a vital clause.

Essentially, a flawed transaction occurs when the solicitor has failed to carry out the transaction as requested or has otherwise been negligent.

If the client wants to sue its solicitor for this flawed transaction, it must do so within the limitation period. The contractual limitation period will run from the date of breach, which will (at the latest) be the date of completion. That is not controversial. However, the limitation period in tort is more debateable. It runs from the date of loss or damage, but when is that? Is this also the date of completion? Or is it some later date?

Traditional position

In Forster v Outred & Co [1982] 1 WLR 86, a mother charged her property to secure a loan for her sons' business. The business failed and the mother was required to pay '70,000. The question was, did the mother suffer loss when she charged her property or when she was required to pay the '70,000?

The Court of Appeal ruled that loss was suffered on the date of the charge. The rationale was that, as soon as the property was charged, the property was worth less. This loss by itself was sufficient to start the limitation clock running and it was irrelevant that there was a later loss when the son defaulted.

In the years following Forster, various cases involving flawed transactions came and went. Bell v Peter Browne & Co. [1990] 2 QB 495 and Knapp v. Ecclesiastical Insurance Group plc [1998] PNLR 172 are two of the better known. But the ruling in Forster was adhered to by the courts.

It seemed incontrovertible. The date of loss was the date of the flawed transaction.

Sephton

Then, in 2006, the House of Lords handed down its judgment in Law Society v Sephton & Co [2006] UKHL 22, and the phrase 'pure contingent liability' forever entered the lexicon of limitation.

Sephton & Co was a firm of accountants who audited the books of a...