Limitation periods, negligence claims and economic loss

The limitation period is the period of time, following an event which would give rise to a claim, within which court proceedings must be commenced. The law on limitation periods is set out in the Limitation Act 1980.

The limitation period in cases of negligence, and breach of contract, is six years from the date when the "cause of action" occurs. So in a case involving physical injuries caused by, say, a car accident caused by a collision, the limitation period runs from the date of the collision.

In cases involving physical loss or physical injuries, such as a car collision, determining when the limitation period started is relatively straightforward. However, what happens in cases of "pure economic loss", that is, loss which is economic only? When does the limitation period start where there is no physical damage?

This was raised in a recent House of Lords case. The Law Society, the body which currently regulates solicitors, brought a claim against a firm of accountants. The accountants were auditors for a firm of solicitors. The accountants had negligently prepared clean annual reports which signed off the accounts of the solicitors. In fact, the solicitors had been stealing money belonging to their clients. The accountants should have noticed this, but did not.

The Law Society was required to compensate the clients and sought to recover the money by suing the accountants.

When did the limitation period start to run?

The accountants argued that the period started either :-

1. when the Law Society relied on the accountant’s negligently prepared reports and did not intervene in the solicitors' practice; or
2. when the funds were first misappropriated after each negligently prepared report.

They argued this on the basis that the Law Society was first exposed to the risk when the events above occurred and that this was sufficient for the period to start running. Both the events had occurred more than six years previously and the accountants argued that the limitation period had therefore expired.

The House of Lords disagreed with the accountants. The Court held that the loss occurred when the Law Society was required to compensate the solicitors' clients.

In other words, the limitation period only starts when there is actual damage which can be assessed in monetary terms. A risk of loss or a risk of future liability is not sufficient for the clock to start ticking.

This article only deals with limitation periods relating to economic loss in negligence claims. The limitation periods vary depending on the type of action you wish to bring, or are required to defend. If you are involved in such action, it is imperative that you seek legal advice at the earliest possibility.

This bulletin is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.

For further information on this or any related topic please contact Philip Cuerden, Lesley Smith, or Carina Sparkes