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Know your limits: Making the most of limitation periods

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Farnhill Richard
Richard Farnhill

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13 January 2011

The rules on limitation tend to attract little attention until the limitation period is about to (or indeed has) expired.

Yet they can operate as an absolute bar on recovery, something that most parties, in litigation, would find to be of considerable significance. By the time litigation is in prospect, though, the die is often cast.

The key to making the most of limitation is forward thinking: dealing with it in the agreement, acting promptly to manage it when claims arise and considering all impacts that the passage of time can have, not just the effects of the Limitation Act. Making the most of your limitations in this way can transform the complexion of your claim.

“It’s all just one big lie.”

Bernard L Madoff, 10 December 2008

Those words sent shockwaves through the world financial system. They also, though, had an effect less noticed at the time but which is becoming increasingly significant. Madoff’s subsequent arrest started running the time limit within which claims based on the fraud had to be brought. But limitation is not confined to the US, nor is it confined to insolvency situations. On the contrary, it has broad application across civil law. For both transactional and contentious lawyers, it can be a critical issue in controlling exposure.

Most commercial legal systems have some law of limitation on actions: beyond a certain period after the claim accrues, ie becomes actionable, no action can be brought on it. The principal English statute is the Limitation Act 1980. In all cases, you need to ask yourself three questions: what is the period; when does it start; and what happens when it finishes?

How long have you got?

The first issue is to identify the correct period. The starting point is the Limitation Act. The most common periods are:

  • Contract: six years, unless the contract is contained in a deed in which case the period is 12 years;1 
  • Tort: generally six years; in the case of negligence, where the loss was not apparent at the time of the tort there is an alternative period of three years from the date on which loss could reasonably have been discovered; in the case of fraud, the period of limitation does not begin to run at all until the claimant has or could reasonably have discovered the fraud;2 
  • Restitution: the period will vary depending on the precise ground for seeking restitution; mistake (one of the most common grounds) is six years from the date on which the mistake could reasonably have been discovered.3

If the claimant has concurrent actions, normally in contract and tort, it will be entitled to choose between them, even if its only motivation in doing so is because the limitation period would otherwise have expired.4

It is open to the parties to vary the period by way of agreement. Often, as the limitation period approaches, a claimant will seek to have the defendant agree an extension in return for not issuing proceedings immediately. Such agreements are enforceable. Similarly, it is open to the parties to agree to shorten the limitation period. That would be unusual where a dispute has already arisen, but is reasonably common in the case of contract claims, where the shorter limitation period is set out in the parties’ agreement. Again, the variation to the limitation period will be enforced by the courts, even where it shortens the period to as little as nine months.5

Starts and stops

Knowing the length of the limitation period is, of course, of little value unless you also know when that period starts to run. There are two key points. The first is when the cause of action first accrues. When that is will depend on the individual cause of action, but generally for contract it is the point of breach whilst for tort it is the point of damage, even where that damage may be initially minor and unapparent. In the case of claims for a debt, acknowledging the existence of the debt will restart the limitation period. However, it must be a formal acknowledgment, in writing and signed.6 The rule only applies to claims in debt, not actions for damages.7

The second key point is the point at which loss could reasonably have been discovered. As is noted above, that can apply in many cases of tort and restitution. Critically, though, it does not apply for contracts. Special care therefore needs to be exercised with contract, since it will not always be readily apparent that there has been a breach. By way of example, in contracts of indemnity insurance, the insurer’s obligation is not to pay an indemnity on the occurrence of an insured loss but, rather, to prevent the insured loss from happening in the first place. Consequently, the breach occurs and time starts to run from the date of the insured loss, not the date that cover is refused.

Limitation will not run when the claimant is under a disability, but the only statutory grounds are infancy and that the claimant is of unsound mind.8 Once the period has started the running of time will generally not be suspended. There are three notable exceptions to that rule. First, the rule on acknowledgment of debts discussed above. Whilst a valid acknowledgment strictly speaking does not suspend the running of time but, rather, restarts it, for all practical purposes the effect is the same. Second, where the claimant was unable to bring a claim for personal injury due to the injuries the court has a discretion to suspend the running of time.9 Finally, if the court sets aside an arbitration award, it can also order that time should be deemed not to have run between the commencement of arbitration proceedings and the setting aside of the award.10

The period stops when either the claimant issues proceedings or on expiry of the statutory period or any agreed extension. The critical date is issue, not service. Whilst there is some split in the case law, it would be safest to assume that if the period expires on a day when the court office is closed, meaning proceedings cannot be issued that day, the period will not be extended until the next business day.11

When the music stops

The final question on limitation is what happens when the period expires without proceedings being issued. An important distinction arises here: does the expiry of the limitation period simply act as a bar to seeking a remedy before the courts or does it extinguish the right altogether? This is not mere semantics. If a defendant is able to assert his right by some way other than bringing a claim, most obviously by way of asserting a set-off, then that right will still have value even where the remedy is time barred. If the right is extinguished altogether, there is nothing left to assert. The approach adopted by English law will depend on the nature of the claim. In the case of contract12 and most torts other than conversion13 only the remedy is barred. In cases relating to title to the recovery of land14 or personal property,15 or arising under the Consumer Protection Act 1987 16 it is the right itself that is extinguished.

The other question that tends to cause issues is amendment. Assume you have brought your claim for negligence on the limitation deadline. Several weeks later you conclude that you would be better claiming for expectation losses, but those are only available for breach of contract, the limitation period for which has expired; can you amend to bring the contract claim? The rules are set out in s35(5) of the Limitation Act: such amendment may be permitted provided the new cause of action arises out of substantially the same facts as are already in issue on any claim previously made in the original action.17 The application of those rules can call for some very fine distinctions.

Other time bars

Limitation is not the only issue to arise for a claimant from the effluxion of time. Some are simply practical: witnesses’ recollections may become less clear, or at least less reliable; documents may be misplaced or destroyed; defendants may encounter financial difficulty or insolvency and so not be worth suing. There are two factors, though, which may extinguish or substantially affect a claim even though the limitation period has not run out.

Laches is an equitable doctrine and so applies only to a party seeking an equitable remedy. In such cases, the claimant must act without undue delay. In assessing that issue the court will look at both the length of the delay and the nature of acts done during the interval.18

Mitigation applies to any claim for damages. It is the obligation of the claimant to take all reasonable steps to minimise its loss. Where it fails to do so, it will be unable to recover that portion of its loss attributable to its delay. Take a straightforward example. The price of silver in early December 2004 was around $6.50 per ounce; it is currently around $28.50 per ounce. If the claimant had a contract for the delivery of silver in December 2004, it will be required to bring it at 2004 prices. Should it delay unreasonably pending the outcome of proceedings, its damages would only permit it to purchase around 25% of the silver it could have purchased had it acted promptly. In an era of volatile markets, such examples are far from exceptional.

Making the most of your limitations

As explained above, forward thinking is critical when dealing with limitation issues. Many people leave it too late. It can be dealt with by agreement, or by acting promptly to manage it when claims arise. Parties must also consider all impacts that the passage of time can have, not just the effects of the Limitation Act.

Further Information

This article first appeared on PLC and can be found by clicking here.

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.

Footnotes

  1. Limitation Act sections 5 and 8.
  2. Limitation Act sections 2, 14A and 32.
  3. Limitation Act section 32.
  4. Henderson v Merrett Syndicates (No 1) [1995] 2 AC 145.
  5. William McIlroy Swindon Ltd and Rannock Investments Ltd v Quinn Insurance Ltd [2010] EWHC 2488.
  6. Limitation Act sections 29-31.
  7. Dŵr Cymru v Marthenshire CC [2004] EWHC 2991.
  8. Limitation Act section 38(2).
  9. Limitation Act section 33.
  10. Limitation Act section 34(5).
  11. Morris v Richards (1881) 45 LT 210; Gelmini v Moriggia [1913] 2 KB 549.
  12. Royal Norwegian Government v Constant & Constant [1960] 2 Lloyd’s Rep 431.
  13. C&M Matthews Ltd v Marsden Building Society [1951] Ch 758.
  14. Limitation Act section 17.
  15. Limitation Act sections 3-4.
  16. Consumer Protection Act 1987 section 11A(3).
  17. See also CPR 17.4.
  18. Lindsay Petroleum Co v Hurd (1974) LR 5 PC 221.