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 between the "orthodox" approach to determining when damage was suffered in tort cases, involving a "real world" comparison of "before" and"after" positions and what he saw as a different and, indeed, difficult test in professional negligence cases.

Accordingly, although someone in the position of Mr B may well have exchanged money for property or rights of equal value, he had suffered a loss in professional negligence because he had not acquired what he ought to have acquired.

In his analysis of the authorities (including the recent Court of Appeal decision in Shore v. Sedgwick Financial Services Limited), the recurring relevant question so far as the judge was concerned was whether the claimant got what he (or she) ought to have got when acting on professional advice. He decided that Mr B had not done so and, therefore, that his loss was suffered at the time of the share acquisition notwithstanding that damage as it might be more widely understood in the "real world" had not materialised.

Indeed, as the judge remarked, the defendant accountants were arguing on the one hand that the claim had been brought too early (as no adverse capital gains tax consequence had yet materialised for Mr B) and on the other that the claim had been brought too late; the apparent tension between these two positions, however, did not prevent the accountants securing a judgment that the claim against them was statute barred.

Further reading: Pegasus Management Holdings S.C.A. and Another v Ernst & Young (a firm) and Another [2008] EWHC 2720 (Ch)
Shore v Sedgwick Financial Services Limited [2008] PNLR 37

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 19/11/2008.