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05 May 2022

Limitation periods for fraud, concealment or mistake: know your limits

The Limitation Act 1980 prevents the pursuit of stale claims and promotes finality in litigation. It also contains safeguards to ensure that potential claimants are not disadvantaged where the cause of action is based on fraud, concealment or mistake and the circumstances giving rise to this are not known to the claimant at the time. Some recent notable cases have considered the appropriate test to apply when assessing a claimant's knowledge in these circumstances and provide important guidance on when the limitation period starts running.

The Limitation Act 1980 (1980 Act) is a key statutory control on the bringing of claims in the English courts. The 1980 Act prevents the pursuit of stale claims and promotes finality in litigation. Section 32 of the 1980 Act (section 32) contains safeguards to ensure that potential claimants are not disadvantaged where the cause of action is based on fraud, concealment or mistake and the circumstances giving rise to this are not known to the claimant at the time (see box “ Section 32 of the Limitation Act 1980”).

A balance must be struck between promoting the public interest in finality in litigation and not unfairly disadvantaging the claimant. At the heart of this balancing act is the issue of when a fraud, concealment or mistake is reasonably discoverable under section 32. Some recent notable cases have considered the appropriate test to apply when assessing a claimant’s knowledge in these circumstances and provide important guidance on when the limitation period starts running.

Mistake

The landmark Supreme Court decision in Test Claimants in the Franked Investment Income Group Litigation and others v HMRC, known as FII, concerned the scope of section 32 where a claim is based on a mistake of law ([2020] UKSC 47). The court held that “reasonably discoverable” means as soon as the claimant realises that it has a worthwhile claim based on the information before it. It overruled the House of Lords decision in Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners, which had tied the date of discoverability of a mistake of law to the date when the truth as to whether the claimant had a well-founded cause of action was established by judicial decision ([2006] UKHL 49; www.practicallaw.com/7-206-4968).
 
FII provided welcome clarity in the context of cases concerning mistake. However, it left open a broader question about the test to apply across cases that engage section 32. Before FII, the test generally applied was the statement of claim test, that is, whether the claimant has sufficient knowledge to be able properly to plead its claim. Arguably, the test set out in FII sets a lower threshold on what constitutes reasonably discoverable: time runs from the point when the claimant has, or could with reasonable diligence have had, sufficient knowledge about the cause of action to justify embarking on the preliminaries to the issue of proceedings, such as seeking legal advice and collecting evidence. Practically, this could have the consequence that time starts to run earlier than under the statement of claim test.
 
However, the Supreme Court in FII expressly declined to consider whether that approach should also apply in fraud cases under section 32(1)(a) and did not comment on whether it should apply in section 32(1)(b) concealment cases. Five months later, in OT Computers Limited v Infineon Technologies and another, the Court of Appeal likewise left open the question as to the appropriate test to apply in section 32(1)(b) cases ([2021] EWCA Civ 501).
 
Whether or not the FII test should be extended to the other limbs of section 32 therefore remains an unresolved issue but recent cases offer insight into the approach that the courts are taking in fraud and concealment claims after FII.
 

Fraud and concealment

European Real Estate Debt Fund (Cayman) Ltd v Treon and others concerned a section 32(1)(a) fraud claim ([2021] EWHC 2866 (Ch)). The High Court determined that it would apply the statement of claim test since the authorities do not clearly establish whether the potentially more liberal test articulated in FII applies to fraud claims.
 
Importantly, the court highlighted that it does not follow that, when investigating a claimant’s state of mind, the court should ignore matters that were known to the claimant before the time at which the statement of claim test is satisfied; the court should not artificially restrict itself to matters that arose only after the cause of action had completely accrued. If a claimant could reasonably have discovered the fraud by virtue of events and circumstances occurring before it actually suffered a loss, it should not be allowed the indulgence of more than the normal six-year period to bring its claim.
 
In Treon, the claimant fund alleged that the defendants had fraudulently misrepresented the financial position of a care home business and had induced the fund to make a principal investment of £11 million. The defendants said that the action was time-barred since it had been commenced more than six years after the date of the principal investment. The court agreed. A reasonably diligent investor, when it reviewed the financial information provided to it before the investment, would have been put sufficiently on inquiry to ask some basic questions and demand further information.
 
The same judge, Mr Justice Miles, also heard Allianz Global Investors GmbH and others v RSA Insurance Group Ltd ([2021] EWHC 2950 (Ch); see BriefingBanking and financial services litigation: 2021 in review”). A number of institutional investors brought claims against RSA alleging losses arising out of misconduct by its Irish subsidiary. The investors argued that RSA should have disclosed the misconduct earlier and that its failure to do so had harmed them.
Proceeding again on the basis of the statement of claim test, the High Court made a number of important points:
 
  • Section 32 requires knowledge that enables the claimant to make, or believe it can make, an allegation. The claimant does not have to have certainty.
  • The required knowledge is of the essential facts constituting the fraud alleged in the claim. It is not sufficient that the claimant could with reasonable diligence have discovered that there was some other fraud or wrongdoing.
  • When considering whether a fraud has been discovered, the courts should take care to avoid the use of hindsight or attributing greater significance to strands of information that have emerged over time than they would reasonably have attributed to the claimant contemporaneously.
  • A two-stage test may be helpful to apply, which first looks at whether there is anything to put the claimant on notice of a need to investigate and then considers what a reasonably diligent investigation would reveal. The requirement of reasonable diligence applies to both stages.
  • In evaluating this, the court will consider how a person carrying on business of the relevant kind would act if they had adequate, but not unlimited, resources and were motivated by a reasonable but not excessive sense of urgency.
  • The test imports objectivity but the court should not assume that the claimant is someone or something they are not; the court should be concerned with the actual claimant, not a hypothetical one.

A month after Allianz Global was handed down, the High Court’s decision in Libyan Investment Authority v Credit Suisse International and others was published ([2021] EWHC 2684 (Comm)). The Libyan Investment Authority alleged that certain transactions had been procured by bribery or undue influence. The court summarily ruled that the claims were time-barred. It held that the Libyan Investment Authority had been in possession of sufficient information and had opportunities to make enquiries to enable it to discover the relevant facts at an earlier stage than it had asserted. Notably, the court said that the less stringent approach in FII is inappropriate where fraud is in issue: instead, a stricter statement of claim test is appropriate.

The most recent case of note is Gemalto Holding BV and another v Infineon Technologies AG and others, which concerned a section 32(1)(b) concealment claim ([2022] EWHC 156 (Ch)). In July 2019, Gemalto issued a claim for damages arising out of an infringement of competition law by the defendants in relation to the smart card chip cartel. It was common ground that there had been a deliberate concealment and so section 32(1)(b) was engaged. The crucial issue for limitation purposes was whether Gemalto could properly have pleaded its claim before the European Commission (the Commission) adopted its infringement decision on 3 September 2014 (www.practicallaw.com/7-584-9386). Importantly, the Commission had announced in April 2013 that it had sent a statement of objections to suspected participants in the cartel, which was widely reported in the press and discussed internally at Gemalto. The defendants said that, at the latest, time had started running by this point and so the claim was time-barred. Gemalto submitted that time started running only when the Commission announced the adoption of its decision.

As in Treon, the High Court applied the statement of claim test for consistency with the approach taken in previous section 32(1)(b) cases, including OT Computers. It declined to express a view on whether that should now be displaced by the FII test, saying that this is a matter that is best decided on the facts of a case where it makes a difference to the outcome.

The court held that, by the time of the statement of objections, Gemalto had sufficient material before it to be able to form a reasonable belief as to the essential elements of a claim for damages arising from the cartel, which was sufficient to plead a claim at that stage. The presence of a statement of objections could properly infer that the Commission’s position did not represent mere speculation or suspicion but would be founded on evidence. Therefore, Gemalto’s claim was time-barred.

Practical implications

The narrative thread from FII through to the recent decision in Gemalto yields a number of important points. The first is that a potential claimant with a cause of action arising from a mistake must understand that the court will take a relatively lenient view on what constitutes “reasonably discoverable” and that leniency will not favour the claimant. Rather, the court may impose a time bar at an earlier stage than would be the case in fraud or concealment cases.

Meanwhile, for potential claimants with causes of action arising from fraud or concealment, the prevailing view is that the statement of claim test will apply. While this is stricter than the test for mistake, claimants would do well to remember that it is not a test of certainty but of possessing the knowledge necessary to properly plead a claim. The onus is on potential claimants and their advisers to be diligent in their enquiries once they are put on notice of a need to investigate.

A final point to note is that, where parallel proceedings are taking place, such as the Commission’s investigation in Gemalto, a claimant should not wait on the outcome of that regulatory decision before analysing whether it has a cause of action. The clock may well have already started ticking.


This article was first published in the May issue of PLC Magazine

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