Al-Rawas v Hassan Khan & Co (a firm) & Anor

This appeal concerns the construction of section 35(3) of theLimitation Act 1980 (the Limitation Act).

Section 35 of the Limitation Act provides as follows:

“New claims in pending actions; rules of court

(1)

For the purposes of this Act, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced –

(a)

in the case of a new claim made in or by way of third party proceedings, on the date on which those proceedings were commenced; and

(b)

in the case of any other new claim, on the same date as the original action.

(2)

In this section a new claim means any claim by way of set-off or counterclaim, and any claim involving either –

(a)

the addition or substitution of a new cause of action; or

(b)

the addition or substitution of a new party;

and ‘third party proceedings’ means any proceedings brought in the course of any action by any party to the action against a person not previously a party to the action, other than proceedings brought joining any such person as defendant to any claim already made in the original action by the party bringing the proceedings.

(3)

Except as provided by section 33 of this Act or by rules of court, neither the High Court nor any county court shall allow a new claim within section 1(b) above, other than an original set-off or counterclaim, to be made in the course of any action after the expiry of any time limit under this Act which would affect a new action to enforce that claim.

For the purposes of this subsection, a claim is an original set-off or an original counterclaim if it is a claim made by way of set-off or (as the case may be) by way of counterclaim by a party who has not previously made any claim in the action.

(4)

Rules of court may provide for allowing a new claim to which subsection (3) above applies to be made as there mentioned, but only if the conditions specified in subsection (5) below are satisfied, and subject to any further restrictions the rules may impose.

(5)

The conditions referred to in subsection (4) above are the following—

(a)

in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as are already in issue on any claim previously made in the original action; and

(b)

in the case of a claim involving a new party, if the addition or substitution of the new party is necessary for the determination of the original action.

(6)

The addition or substitution of a new party shall not be regarded for the purposes of subsection (5)(b) above as necessary for the determination of the original action unless either—

(a)

the new party is substituted for a party whose name was given in any claim made in the original action in mistake for the new party's name; or

(b)

any claim already made in the original action cannot be maintained by or against an existing party unless the new party is joined or substituted as plaintiff or defendant in that action.”

The question of construction that arises is this. C brings a claim against D, which is in time. D (not having previously made any claim in the proceedings) wants to counterclaim against C, but a fresh action to advance that counterclaim would be out of time at the time when C’s claim is brought. Does section 35 of the Limitation Act, in particular subsections (1) and (3) of section 35, nevertheless allow D to bring the counterclaim, as a matter of right?

On 11 November 2014, Master Yoxall held that as a matter of construction, it did. On 31 January 2015, Elisabeth Laing J, came to the contrary view. In my judgment she was right to do so, and for the reasons given below, I would dismiss this appeal.

In view of the narrow issue of construction on which this appeal turns, the facts can be dealt with relatively shortly.

The claimants in both cases are firms of solicitors. They sue the defendants who are husband and wife and former clients of theirs, in two separate actions, for unpaid legal fees and/or disbursements arising out of various retainers.

Mrs Al-Rawas, the defendant in the first action, retained the claimants to act on her behalf in proceedings against a Mauritian company called Pegasus Energy Limited, in relation to a share issue which occurred in February 2005 which she alleged prejudiced her rights as a shareholder (the Pegasus Retainer). The claimants, acting on her behalf made two ex parte applications in those proceedings; the first, for an injunction and a search and seizure order, which was granted by Dobbs J on 27 July 2006; and the second, for a worldwide freezing order which was granted by Langstaff J on 14 August 2006. An affidavit from Mr Al-Shanfari, the defendant in the second action, was relied on in support of both applications. On 6 September 2006, at an inter partes hearing, Ramsey J discharged the search and seizure order and the freezing order; he also made an order for damages and costs against Mrs Al-Rawas, and an order joining Mr Al-Shanfari to the proceedings for the purpose of obtaining a costs order against him.

In the case of Mr Al-Shanfari, the claimants provided legal services in respect of two separate retainers. The first retainer related to a property dispute which concerned a property Mr Al-Shanfari owned in Trevor Street in London (the Trevor Street retainer); the second retainer related to sanctions imposed on Mr Al-Shanfari by the Office of Foreign Assets Control Department of the United States Treasury (“OFAC”) on the grounds of his support of the regime in Zimbabwe (the OFAC retainer).

On 1 August 2013, the claim forms in the actions before us, were issued. The claimants’ claim was for disbursements of £354,151 plus interest against Mrs Al-Rawas, in respect of the Pegasus retainer; and for legal fees and disbursements of £285,968 plus interest, against Mr Al-Shanfari in respect of the Trevor Street retainer and the OFAC retainer. On 4 April 2014, Mrs Al-Rawas and Mr Al-Shanfari each served a defence and counterclaim. Both counterclaims alleged that the claimants had been guilty of professional negligence in relation to the Pegasus retainer. The counterclaim for Mrs Al-Rawas was made in both contract and tort. Mr Al-Shanfari’s counterclaim was made in tort only, because he had no contractual relationship with the claimants in respect of the Pegasus retainer.

Both counterclaims ‘over-top’ the claims in value. In the case of Mrs Al-Rawas, she claims (i) damages paid to Pegasus, and other parties in excess of £573,337; (ii) costs paid to Pegasus and other parties in a sum to be confirmed (which the claimants estimate to be in the region of £735,000, based on the interim costs certificate); (iii) wasted expenditure in fees and expenses paid to the claimants, and interest on the foregoing amounts. In the case of Mr Al-Shanfari, he also claims (i) the costs paid to Pegasus and other parties in a sum to be confirmed; (ii) general damages to be assessed and (iii) wasted expenditure in fees and expenses paid to the claimants, plus interest on the foregoing amounts.

On 15 May 2014, the claimants filed and served a reply and defence to each counterclaim. The defence to counterclaim in each case pleaded amongst other things, that the counterclaim was time-barred by 6 September 2012 at the latest. Neither of the defendants served a reply to the defence to counterclaim. There was therefore no pleaded response from either defendant to the limitation defence relied on by the claimants.

On 30 September 2014, the claimants applied for summary judgment or for an order striking out the defendants’ counterclaims on the ground that they were time-barred. Those applications were opposed at the hearing before Master Yoxall on 22 October and on 11 November 2014.

A number of matters were common ground at that stage, as they have been subsequently. Firstly, that the defendants had each pleaded an “original set-off (Footnote: ¹) and counterclaim” within the meaning of section 35(3) of the Limitation Act. Secondly, that for limitation purposes, the defendants’ causes of action in the counterclaims (in contract and in tort for Mrs Al-Rawas, and in tort for Mr Al-Shanfari) accrued at the latest by 6 September 2006, pursuant to section 2 of the Limitation Act (for tort) and section 5 of the Limitation Act (for contract). Thirdly, that it therefore followed that the counterclaims were time-barred if commenced as separate actions at the date of the issue of the claims on 1 August 2013. And fourthly, that Mrs Al-Rawas was entitled to rely on an equitable set-off by way of defence to the claimants’ claim against her.

Master Yoxall dealt with two principal issues, only the second of which is the subject of this appeal. The first was whether Mr Al-Shanfari could rely on the defence of equitable set-off; the Master held he could not do so, because there was not the necessary close connection between his defence and the claim. The second was the limitation issue with which this appeal is concerned. The Master concluded with some hesitation, that provided a defendant had an original claim, within the meaning of section 35(3) of the Limitation Act, he could plead it as a counterclaim, even though, if brought as an independent claim, it would be time-barred. In this case, as he put it: “...the door had been opened” by the claimants bringing an action against the defendants. He therefore dismissed the claimants’ applications for summary judgment and/or to strike out the defence, but gave permission to appeal on the limitation point only.

Elisabeth Laing J’s reasons for reaching the contrary conclusion to that of the Master, were these: (i) that the heading of section 35 and its position in the Limitation Act suggested not that its likely effect was to dis-apply the primary limitation periods but that its effect was a more modest procedural one; (ii) that the effect of section 35 was not to dis-apply the primary limitation periods which remained effective for “the purposes of this Act” but to give a defendant who counterclaimed a modest dispensation, which is that his new claim is deemed to have been commenced not on the date when it was in fact commenced, but on the earlier date, when the claim against him was commenced; (iii) that it affected the end point of any applicable limitation period, but not the start point, which is still determined by sections 2 and 5 of the Limitation Act, for the purposes of this case; (iv) that section 35(3) permits the defendant who makes an original set-off and counterclaim to take advantage of the modest adjustment to the law of limitation which is made by section 35(1)(b), but does not permit a defendant who makes “an original set-off or counterclaim” to get round the fact that the primary limitation periods have expired before the claimant’s claim was commenced. See in particular, paragraphs 41 to 45 of her judgment.

Mr Philip Rainey QC for the defendants, submits that the judge’s approach to the issue of construction was wrong. Rather than considering the words used in section 35(3), she made an assumption about the purpose of that section, and then adopted an analysis of the legislation to achieve that purpose. And he cites some observations by Elias LJ in R (Eastenders Cash & Carry plc) v Revenue & Customs Comrs (CA) [2012] 1 WLR at para 76 disapproving of such an approach. Mr Rainey submits that read literally, the words “other than an original set-off and counterclaim”, in section 35(3) mean that the prohibition imposed by section 35(3) on bringing new ‘time expired’ claims in in the course of any action (except as provided by the rules of court and by section 33 of the Limitation Act) applies to all new claims made in the course of any action “other than an original set-off or counterclaim”. In consequence, an original set-off or an original counterclaim may be brought after the expiry of any limitation period which would apply if such claims were brought as a fresh action. For this limited purpose therefore, such claims fall outside the deeming provisions in section 35(1)(b) of the Limitation Act (which provide that for limitation purposes, the deemed date of commencement of “a new claim” made in the course of any action is “the same date as the original action”). On this construction, a defendant, who wishes to rely on “an original set-off or counterclaim”, in proceedings where he has not made a claim before, has “one shot” as Mr Rainey describes it, of doing so, regardless of when the limitation period for that claim (if brought as separate action) expired.

Mr Rainey concedes that this could open the door to extremely stale counterclaims, unrelated to a claimant’s claim. However, he submits the prospect, in an extreme case, of a counterclaim being brought, many years after the events in question, is a remote one; and the court could exercise its case management powers to strike out a very stale claim as an abuse of the court’s process. He says the result of the construction for which he contends is not “so absurd” that it cannot be concluded Parliament did not intend it; and it would (for example) prevent an injustice in a case where there was a “disconnect” between limitation periods for a claim and counterclaim, not catered for by the doctrine of relation back.

Ms Leigh-Ann Mulcahy QC for the claimants however submits that Elisabeth Laing J’s reasons for rejecting the defendants’ construction argument are correct. In her submission, the effect of the words “other than” in section 35(3) is much more limited. They simply remove “an original set-off or counterclaim” from the restrictions on bringing time-expired “new claims during the course of any action” otherwise laid down in sections 35(4) and (5) of theLimitation Act 1980 and in the rules of court made pursuant to those subsections. The effect therefore of section 35(3) is that there are three exceptions to the general prohibition which is imposed by section 35(3) on bringing such time expired new claims during the course of any action: the section 33 exception, the rules exception, and the exception for an original set-off and counterclaim. However, in respect of the latter two exceptions, and in particular on the point that arises in this appeal, an “original set-off or counterclaim” remains a “new claim made in the course of any action” for the purposes of section 35(1)(b); and thus, for limitation purposes, can only obtain the modest benefit of the doctrine of relation back, but no greater benefit.

Ms Mulcahy accepts (as indeed does Mr Rainey) that there is a degree of ambiguity in the wording of section 35(3) of the Limitation Act, caused in particular by the location of the phrase “other than an original set-off or counterclaim” in that subsection. However, she submits the interpretation for which she contends is consistent with a literal construction of section 35(3) in its proper context, it is consistent with the purpose of the enactment, and it is consistent with authority (insofar as relevant to these appeals).

On any view, section 35 of the Limitation Act is not a model of clarity. It has been described by Professor Andrew McGee as “one of the most convoluted provisions in the entire law of limitations”, an observation cited with approval by Lord Collins of Mapesbury JSC in Roberts v Gill [2010] UKSC 22; [2011] 1 AC 240, at para 3.

The Limitation Act is a consolidating measure, and is divided into three parts. Part I is headed “Time limits under Part I subject to extension or exclusion under Part II”. The ordinary time limits for bringing actions (of the classes mentioned in Part I of theLimitation Act 1980) are given in that Part. Those ordinary time limits are then subject to extension or exclusion in accordance with the provisions of Part II: see section 1 of the Limitation Act. Part II of the Limitation Act is headed “Extension or Exclusion of Ordinary Time Limits” and provides for the extension or exclusion of these ordinary time limits in particular cases. Section 32A for example, gives the court a discretion to exclude the time limit for actions for libel, slander or malicious falsehood and by section 33, the court has a discretion to exclude the time limits for actions in respect of personal injuries or death.

Section 35 of the Limitation Act is not in Part II of the Limitation Act, but in Part III (Miscellaneous and General Provisions). It was enacted in its current form following the recommendations made by the Law Reform Committee in 1977 in its Final Report on Limitation of Actions: Cmnd 6923. The legislative history of section 35 is summarised in Roberts v Gill at paras 24 to 37.

Section 35 applies the Limitation Act to new claims made in the course of an action, including claims by way of set-off or counterclaim, and claims involving the addition or substitution of a new cause of action or a new party. Its two main objectives are to enable a claimant to amend pleadings out of time so as to sue in another capacity; and to enable parties to be added out of time where joinder is necessary if the claimant’s claim is to succeed: see Roberts v Gill at paragraph 2. The complexity of section 35 arises in part because of the somewhat disparate number of matters that it deals with, some procedural and some substantive. Sections 35(1) and 35(3) lay down binding rules, and the remainder of the section provides for rules of court to be made permitting amendments, subject to conditions, by way of new causes of action and new parties: see Roberts v Gill at para 32.

At para 38 of Roberts v Gill Lord Collins summarised so far as relevant to that appeal, the effect of the provisions of section 35, and the Civil Procedure Rules with which section 35 must be read:

“(1)

A new claim means a claim involving either (a) the addition or substitution of a new cause of action; or (b) the addition or substitution of a new party: section 35(2).

(2)

Any new claim made in the course of an action is deemed to have been commenced on the same date as the original action: section 35(1).

(3)

No such new claim may be made after the expiry of any applicable limitation period, except as provided by rules of court: section 35(3).

(4)

Rules of court may provide for allowing a new claim, but only (a) in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as are already in issue on any claim previously made in the original action; and (b) in the case of a claim involving a new party, if the addition or substitution of the new party is necessary for the determination of the original action (i.e. any claim made in the original action cannot be maintained by an existing party unless the new party is joined as claimant or defendant): section 35(4), (5), (6). The relevant rules of court are in CPR 17.4 and 19.5.

(5)

CPR 17.4(2) has the effect that a new claim may be added by amendment but only if the new claim arises out of the same facts or substantially the same facts as the original claim.

(6)

CPR 19.5(2), (3) have the effect (among others) that a new party may be added only if the limitation period was current when the proceedings were started, and the addition of that party is necessary in the sense that the claim cannot properly be carried on by the original party unless the new party is added.

(7)

Rules of court may allow a party to claim relief in a new capacity: section 35(7). The relevant rule is CPR 17.4(4), by which the court may allow an amendment to alter the capacity in which a party claims if the new capacity is one which that party had when the proceedings started, or has since acquired.”

Section 35(1)(b) deems the commencement date for new claims made during the course of an action to be the date when the action was commenced, rather than the date when the new claim was made. It is to be noted that the deeming provision applies to “any new claim”; and that by virtue of section 35(2), in “this section”, that is, in section 35, a new claim means “any claim by way of set-off or counterclaim”. (emphasis added)

The origin of section 35(1) is to be found in section 28 of the Limitation Act 1939. This provided that:

“For the purposes of this Act, any claim by way of set-off or counterclaim shall be deemed to be a separate action and to have been commenced on the same date as the action in which the set-off or counterclaim is pleaded.”

The purpose of making “the issue of P’s writ, the terminus ad quem for D’s counterclaim” is to prevent the injustice which may be caused where a claimant, by timing his claim carefully, can deprive the defendant of an effective answer to his claim: see the Law Reform Committee’s Final Report on Limitation of Actions: Cmnd 6923, para 5.7.

The doctrine of relation back also has implications however for new claims added to an existing action by amendment, as Tomlinson LJ explained in Ballinger v Mercer [2014] EWCA Civ. 996; [2014] 1 W.L.R. 3597, at para 25:

“It must be borne in mind that the context of the debate is the doctrine of relation back introduced by section 35(1) of theLimitation Act 1980. If a new claim is permitted by way of amendment it is treated as having been made by way of a separate action commenced on the same date as the original action. So where an amendment is permitted to introduce a new cause of action which was in time at the date of the commencement of the action but arguably out of time on the date on which permission to amend is granted, the defendant is therefore precluded from reliance at trial on the arguable limitation defence.”

Although the word “amendment” is not used, section 35(3) is of course, principally concerned with amendment. Section 35(3) provides that the general rule is that new claims, “within section (1)(b)” i.e. those made in the course of any action, including “any claim by way of set-off or counterclaim” shall not be allowed after the expiry of any time limit under the Limitation Act, which would affect a new action to enforce that claim. To this general rule, there are two exceptions: first, as provided by section 33 of the Limitation Act, and secondly, by rules of court.

Section 33 provides for the discretionary exclusion of the time limit for actions in respect of personal injury or death. Where section 33 applies, the time limit has been disapplied altogether, and no question of relation back can arise. It is the second ‘rules’ exception, which is material here. In my view, the disputed sub-clause, “other than an original set-off or counterclaim” simply excepts “an original set-off and counterclaim” as defined by section 35(3) from the special restrictions which sections 35(4) and (5) and the relevant rules of court made pursuant to those subsections, otherwise apply to the addition of time-expired claims made in the course of an action. To that extent, this creates a discrete exception to the general rule that new claims, “within section (1)(b)” shall not be allowed after the expiry of any time limit under the Limitation Act, which would affect a new action to enforce that claim; and also a specific exception to the application of the rules restricting the circumstances in which such claims may be added.

An “original set-off or counterclaim” does not however cease to be a new claim made during the course of an action for the purposes of section 35(1)(b); still less is it removed from the operation of the primary periods of limitation contained in Part I of the Limitation Act. Its deemed date of commencement is the date of the original action; and for limitation purposes, it therefore gets the benefit of the doctrine of relation back, but no greater benefit.

Section 35(3) thus achieves two objectives: it provides for the restriction of the circumstances in which amendments permitting time-expired claims may be made (through the ‘rules’ route), whilst preserving the protection of the doctrine of relation back for a defendant, where the claimant commences proceedings very close to the limitation period.

The matter was put in this way by the Law Commission, under the Chairmanship of Carnwath J, as he then was, in its report on Limitation of Actions: no 270, in 2001, at para 5.6 and at footnote 10 to that paragraph:

“Where a party seeks to add a new claim to existing proceedings the new claim is treated as having been commenced on the same date as the original proceedings (that is, the claim is ‘related back’ to the date on which the original proceedings were commenced). Where any fresh proceedings to commence such a claim would have been time-barred, the effect of this provision is to deny the defendant to the new claim an opportunity to raise a limitation defence. For this reason, special restrictions are imposed on the ability to add such new claims.”

Footnote 10 went on to say:

Two exceptions are made to the imposition of these special restrictions:Limitation Act 1980, s 35(3). First, no restrictions are imposed where the court exercises its discretion underLimitation Act 1980, s 33 to exclude the relevant time limits for actions in in respect of personal injuries or death. Secondly, no restrictions are imposed where the new claim is brought by way of an original set-off or counterclaim … The purpose of this second exception is to protect the defendant’s position where the claimant commences proceedings very close to the limitation period.”

Thus, while I agree there is a syntactical ambiguity in the wording of section 35(3), in my view, the subsection does not have the meaning or effect for which Mr Rainey contends.

Roberts v Gill was not concerned with the phrase “other than an original set-off or counterclaim” on which this appeal has focused. For the purposes of this appeal however, I would respectfully add to Lord Collins’ analysis set out at para 25 above, the following words in italics (adding the first two paragraphs to put the addition into context):

In my opinion, this analysis finds support from other interpretative factors, and from some observations made (obiter) in two cases to which we were referred.

As Ms Mulcahy submits, it is difficult to discern any intelligible legislative policy behind a provision which would enable a counterclaim of any age, and no matter how stale, to be pursued, merely because, as a matter of happenstance, the party raising such a new claim, had been sued. The judge pointed to the absence of clear words mandating such a surprising result; and she characterised such an intention as ‘capricious’ and productive of legal uncertainty. I agree.

As already stated, section 35 is placed in Part III of the Limitation Act, not in Part II: see para 22 above. It is to be observed that the “open door” approach to limitation, which it is suggested section 35(3) permits, would be contrary to the careful and nuanced approach to be found elsewhere in the Limitation Act to the extension or exclusion of the ordinary limitation periods in Part I (by sections 32A and section 33 for example). Had Parliament intended to create such an exception to the protection that the Limitation Act provides for the benefit of a party who might otherwise have a “cause of action hanging over him like a sword of Damocles, for an indefinite period” per Lord Scott of Foscote in Haward v Fawcetts(a firm) [2006] 1W.L.R. 682, at para 32, in my view this would have required very clear words; and it cannot sensibly be said that Parliament provided them here. I also do not accept that the problems to which the prosecution of stale claims can give rise can be catered for by the use of the court’s case management powers: indeed it might be thought the use of those powers as a control mechanism would be contrary to the legislature’s intention in creating such a wide exception in the first place.

Observations made in Lloyds Bank plc v Wojcik and anor, unreported, 19^th December 1997 (Court of Appeal), and in JFS (UK) Ltd v Dwr Cymru Cyf [1999] 1 WLR 231 do in my opinion provide some support for the claimants’ position. These were ‘amendment’ cases, where the plaintiff’s original action was issued before the limitation period for the proposed counterclaim had expired; thus the point at issue in this appeal did not directly arise.

In Lloyds Bank plc v Wojcik however, Evans LJ, giving the judgment of the court, said this about a defence and counterclaim in an originally served pleading:

“It is clear in our judgment that a set-off and counterclaim may be made in that pleading, even though the cause of action is time-barred when the pleading is served, provided that it was not time barred when the action was commenced by issue of the writ or summons (section 35 subsections (1) and (3)” (emphasis added): see page 12 of the transcript

Similar observations were made in JFS v Dwr Cymru Cyf at page 236E by Nourse LJ in a judgment with which Evans LJ and Ward LJ agreed, where it was said that section 35(1)(b) enabled a defendant who included a counterclaim in his original defence to overcome any limitation objection which would otherwise have arisen between the date of the writ and the date of the defence.

Though the point does not arise for determination on this appeal, as those cases also make clear, where a party wishes to amend to add “an original set-off and counterclaim” as defined by section 35(3) after the expiry of the applicable limitation period, the amendment is not subject to the special restrictions in section 35(4) and (5), and CPR 17.4, though permission to amend is still required in the usual way: see Lloyds Bank plc v Wojcik at pages 11 and 12 of the transcript and JFS v Dwr Cymru Cyf at 235F. See further, CPR 17.1(2)(b) and CPR 20.4(2)(b). If permission to amend is then granted, the claim added by amendment gets the benefit of relation back to the date of the (claimant’s) original claim: see Law Society v Shah and ors (No 2) per Norris J at para 15, but no greater benefit.

Finally, it is of some note, as Ms Mulcahy points out, that the construction argument advanced by the defendants in this appeal did not feature in Aspect Contracts (Asbestos) Ltd v Higgins Construction plc [2015] UKSC 38; [2015] 1 W.L.R. 2961. This was heavily contested commercial litigation which had limitation issues at the heart of it; yet its underlying premise was that the primary limitation periods applied to an original counterclaim; in consequence, it was held that the defendant’s counterclaim for the unpaid balance of an arbitration award (on the facts, clearly an original counterclaim within the meaning of section 35(3)) was time-barred: see paras 26, 27, and 33 of the judgment of Lord Mance JSC, with whom Lord Wilson, Lord Sumption, Lord Reed and Lord Toulson JJSC, agreed.

For the reasons given, I would dismiss this appeal.

I agree.

I also agree.