Issuu on Google+

Time Limits for Negligent Advice Will the High Court Extend the Boundaries? by Helen Barnett | November 2006

On 8 May 2006, the ACT Court of Appeal upheld a finding by Chief Justice Higgins in the case of Commonwealth of Australia v John Griffith Cornwell1 (Cornwell). The case dealt with a cause of action for negligent misstatement brought by a member of the Commonwealth Superannuation Fund that was not statute barred even though it was brought some 29 years after the statement had been made by the Employer. On 1 September 2006, the High Court granted the Commonwealth leave to appeal this decision. The High Court has noted that the outcome of this case could effect over 200 similar cases and as much as $198 million dollars of superannuation entitlements.2

The Facts Mr Cornwell was employed as a tradesman by the Commonwealth in the 1960s. At that time only permanent members of the public service were automatically entitled to membership of the Commonwealth Superannuation Fund (the Fund). Mr Cornwell was not initially employed as a permanent member of the public service and therefore was not a member of the Fund. In 1965, Mr Cornwell sought advice from the Manager of the Transport Section as to his eligibility to join the Fund. The Manager told him that he was not eligible, but that he would “see what he could do”. He subsequently obtained information indicating that there was provision for “temporary” or “industrial” employees to apply for membership of the Fund. However, he did not pass this information on to Mr Cornwell. In 1987, Mr Cornwell became a permanent member of the public service and joined the Fund. He continued to be employed in the public service until his retirement in 1994. Shortly prior to his retirement he inspected his personnel file and discovered documentation indicating that he could have applied to become a member of the Fund in 1965. In addition to the return of their own contributions plus statutory interest, members of the Fund are entitled to a pension on retirement from the public service. The retirement pension that Mr Cornwell would have received if he had joined the Fund in 1965 would have been significantly greater than the pension he was due to receive after his seven years of membership since 1987. In November 1999, Mr Cornwell commenced an action for negligent misstatement against the Commonwealth. Section 11 of the Limitation Act 1985 (ACT) requires that any action be brought within six years of the date the cause of action accrues. The Commonwealth alleged that the action was statute-barred, as the cause of action had accrued (at the latest) when Mr Cornwell became a member of the Fund in 1987.

1

T U R KSLEGAL


The Law It is accepted that a cause of action, whether in common law tort or under the Trade Practices Act 1984, will only accrue when actual loss or damage has been sustained by the plaintiff. To determine when a cause of action starts to run the Court must first decide when the plaintiff suffered loss or damage. The leading Australian authority on this issue is Wardley Australia Limited v The State of Western Australia3 where the High Court held that in cases of contingent loss (i.e. where the loss is contingent upon the occurrence of a future event), the cause of action will not arise until the contingency has occurred. Prior to that the plaintiff’s loss is prospective only, as it is possible that the contingency may never occur. In coming to this decision the High Court diverged from a number of English authorities.

At First Instance In reliance on Wardley, Chief Justice Higgins found that Mr Cornwell’s cause of action had arisen on his retirement in 1994, and therefore the matter was not statute-barred. The Commonwealth appealed the decision.

On Appeal The Court of Appeal dismissed the Commonwealth’s appeal. The Commonwealth had not attempted to argue for rejection of the principles in Wardley (which, given its binding nature, is hardly surprising). Instead, they referred the Court to a number of statutory modifications made to the Fund between 1965 and 1987. They argued that Mr Cornwell’s damages had been crystallised at one or more of these points in time. As the value of his loss could have been assessed or estimated at any one of these moments, the Commonwealth submitted that they were appropriate times at which to find that the cause of action had accrued. However, the Court of Appeal noted that under the relevant rules of the Fund, members were only entitled to the additional retirement pension if they remained in the public service until retirement (whether by age or disability). Therefore, if Mr Cornwell had left the public service prior to retirement age to work in the private sector, he would only have been entitled to the return of his own contributions plus statutory interest. The Court indicated that it would then have been unable to assume that Mr Cornwell had suffered any economic loss at all by being kept out of the Fund, as the contribution monies that would otherwise have been deducted would have been available for his own use between 1965 and 1987. The Court of Appeal held that the loss and damage suffered by Mr Cornwell was purely contingent on his retirement while still in employment with the public service. As Mr Cornwell had served in the public service until retirement, he was entitled to the additional retirement pension – and had suffered loss on retirement, by reason of the fact that he had been a member of the Fund for seven rather than 29 years. The cause of action arose on the date he suffered this loss, being the date of his retirement. As his claim had been made within six years of his retirement, the Court of Appeal held that it was not statute-barred.

2

T U R KSLEGAL


Law Society v Sephton & Co Just two days after the Court of Appeal’s decision in Cornwell, the House of Lords delivered judgment on Law Society v Sephton & Co4. The case involved contingent loss. Similar to Wardley, the House of Lords held that the loss suffered was purely prospective until such time as the contingency occurred, as there was always the possibility that it would never occur. In their decision the House of Lords approved and adopted the High Court’s analysis of the relevant English precedents in Wardley, confirming that these authorities were confined to circumstances where, in addition to a contingent loss or liability, there had been an immediate loss suffered by the Plaintiff on entering into the agreement.

Implications of Cornwell & Sephton The question of when a cause of action accrues is only likely to be of interest if it brings into play any relevant statutory limitations. Although it remains open for the Commonwealth to argue before the High Court that Wardley should be overturned, the likelihood of such arguments being accepted is slim now that the House of Lords has adopted the same position. The proposition that a cause of action in tort for contingent loss will not accrue until the contingency is fulfilled seems to be here to stay. Although Cornwell involved a negligent misstatement by an employer concerning an employee’s eligibility to join the Fund, it has obvious implications for trustees, their administrators and also for financial advisers. If a client is provided with negligent advice that results in them acting to their detriment, the cause of action will not arise until they suffer the detriment at the time they retire. Given that superannuation funds generally only retain records for 10 years, establishing a defence to an action brought so many years after the event will in most cases be extremely difficult, as witnesses may be unavailable or memories may have faded. Cornwell also has implications for those who provide or take out professional indemnity insurance under “claims made” policies. Insurers may face an increased claims exposure, particularly in circumstances where unlimited retroactive cover is provided. In addition, insureds may also be faced with the need to maintain “run off” cover for longer periods. We will have to wait for the decision of the High Court before this area of law is finally settled.

Endnotes [2006] ACTCA 7. (“Cornwell”) Commonwealth of Australia v Cornwell [2006] HCATrans 464 (1 September 2006). 3 (1992) 175 CLR 514. (“Wardley”) 4 [2006] UKHL 22. (“Sephton”) 1 2

3

T U R KSLEGAL


For more information please contact: Helen Barnett Lawyer T: 03 8600 5004 helen.barnett@turkslegal.com.au

Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 10 (North Tower) 459 Collins St, Melbourne VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099

Business & Property | Commercial Disputes & Insolvency | Insurance & Financial Services Workers Compensation | Workplace Relations www.turkslegal.com.au


Time Limits for Negligent Advice - Will the High Court Extend the Boundaries?