Law Society v. Sephton & Co (a firm) & Ors

The House held that a mere contingent liability does not constitute actionable damage for the purposes of the six year limitation period in the Limitation Act 1980 (section 2). In the context of the Solicitors' Compensation Fund, the possibility that the Fund might have to pay out as a result of a solicitor's misappropriation did not, of itself, create the relevant damage; the cause of action in tort accrued only when a claim was actually made on the Fund. The court therefore rejected Sephton & Co's argument that the Law Society's cause of action accrued on each negligent accountants' report or on each subsequent misappropriation. Section 14A of the Limitation Act (the three year knowledge period) did not assist the Law Society on the facts because the Society knew the relevant facts well before that period began. The court did not find it necessary to decide the Law Society's cross-appeal on estoppel.

The Law Society, as trustee and administrator of the Solicitors' Compensation Fund established under section 36 of the Solicitors Act 1974, sued Sephton & Co in negligence for negligent accountants' reports which failed to expose misappropriations by a sole practitioner, Mr Payne. Over several years Payne misappropriated client monies and Sephton provided clean annual reports covering the years 1988-1995. The Society paid substantial grants from the Fund to Payne's clients after claims were made in 1996 and later. Sephton contended that the Society's negligence claim was time-barred because damage had accrued earlier (on delivery of the negligent reports or on subsequent misappropriations) and thus outside the six year limitation period under section 2 of the Limitation Act 1980.

The procedural history: the preliminary issues were tried by Mr Michael Briggs QC in the Chancery Division ([2004] EWHC 544 (Ch)), who held against the Society on both limitation and estoppel; the Court of Appeal ([2004] EWCA Civ 1627; [2005] QB 1013) reversed the judge on the limitation point in favour of the Law Society (Neuberger LJ dissenting on limitation); Sephton appealed to the House of Lords and the Law Society cross-appealed on estoppel.

The primary legal issue was when the Law Society suffered "damage" sufficient to start the running of the six year limitation period: whether the mere exposure to a possible future liability (a contingent obligation to make grants from the Compensation Fund) constituted actionable damage or whether damage occurred only when a claimant actually presented a claim on the Fund (and, as the court put it, when the contingency was fulfilled). The House reviewed the authorities (including Forster v Outred & Co, Nykredit, Wardley (High Court of Australia) and others) and concluded that a purely contingent liability standing alone does not amount to actionable damage. The court accepted the analysis in Wardley that contingent obligations do not give rise to damage until the contingency is fulfilled. On that basis the House dismissed Sephton & Co's appeal, holding that the Society's cause of action did not accrue more than six years before it issued its claim. The cross-appeal on estoppel was unnecessary to decide and was not determined.

Appeal dismissed. The House held that a mere contingent liability is not actionable damage for the purposes of section 2 of the Limitation Act 1980; the Law Society's cause of action in tort in respect of the Compensation Fund did not accrue more than six years before issue because actionable damage did not arise until a claim was made on the Fund. Consequently the limitation defence failed and it was unnecessary to determine the cross-appeal on estoppel.

At first instance the preliminary issues were heard by Mr Michael Briggs QC sitting in the Chancery Division, who held that the Law Society's claims were statute-barred [2004] EWHC 544 (Ch). The Court of Appeal (majority) allowed the Law Society on the limitation point and held the claim had not accrued more than six years before issue; cited as [2004] EWCA Civ 1627; [2005] QB 1013. Sephton & Co appealed to the House of Lords which dismissed the appeal ([2006] UKHL 22).