Starting the Limitation “Stopwatch” – The Importance of “Discoverability of Breach” in Tortious Actions Resulting in Latent Damage

The Limitation Act 1953 (“Act”) limits the period within which an action in Court or arbitration may be commenced to enforce rights, interests, benefits, or to seek some relief or remedy. Actions founded on contract or tort shall not be brought after the expiration of six years from the date on which the cause of action accrued (Section 6(1)(a) of the Act). Upon expiration of the limitation period, the claim is “time-barred”. 

While some cases are clear as to when a cause of action would accrue for the purpose of determining whether a claim is “time-barred”, the question then arises as to when the limitation period would start to run on a tortious claim of negligent misstatement, which was undiscoverable until damage was later suffered as a result. 

The Federal Court had occasion to consider this question in the case of Julian Chong Sook Keok & Anor v Lee Kim Noor & Anor [Civil Appeal] (No. 02(f)-63-10/2021(P)) where, among others, the question before the Federal Court was “In a tortious claim arising from a negligently prepared agreement, does the time-period for limitation begin to run from the date of the impugned agreement; or does time begin to run from the date of an infringement or threat of infringement of a claimant’s right caused by the impugned agreement”.

What Are the Facts?

• The Plaintiffs purchased a landed property from a housing developer and engaged a consultant to build a three-storey semi-detached house on that property. The Defendants were engaged as their solicitors to prepare the Sale and Purchase Agreement (“SPA”) dated 22 April 2004. 

• Within the SPA, the details on “Name of Bank/Financier” were left blank by the Defendants, indicating that the property purchased by the Plaintiffs from the developer was not encumbered or charged. In 2006, the Plaintiffs moved into the property within a housing community known as Krystal Garden.

• In 2009, the Plaintiffs heard from their neighbours that several plots of land in Krystal Garden were encumbered and charged to Bank Islam and that a letter of disclaimer from Bank Islam was required. The Plaintiffs then instructed the Defendants to require this letter of disclaimer from Bank Islam. The Defendants wrote to Bank Islam on 30 July 2009, but no response was received from the bank. 

• The developer was wound up on 15 June 2011 and sometime in November 2011, the Plaintiffs were formally notified by the land office that landowners who did not have a letter of disclaimer from Bank Islam would be required to pay a redemption sum. 

• In January 2012, the Plaintiffs asked the Defendants for a copy of the search performed at the land office, which would ordinarily be done when preparing the SPA. During a meeting with the land office in February 2012, the Plaintiffs learnt that their property was, in fact, charged to Bank Islam. Around the same time, the Defendants replied to the Plaintiffs’ query for the searches to state that they were unable to locate the same and speculated that this was likely because the same must have yielded negative results. It turns out that the Defendants did not conduct any land search to verify the status and potential encumbrances of the property at the time of preparation of the SPA.

• On 2 September 2014, the Plaintiffs were informed by Bank Islam that they had to pay the redemption sum of RM 900,000.00 or the bank would apply for the property to be sold by auction. The Plaintiffs filed a claim against the Defendants for negligent misstatement on 28-07-2015. At the time of the Plaintiffs’ claim, Section 6A of the Act had yet to be introduced.

What Did the Lower Courts Decide?

• The High Court Allowed the Plaintiffs’ Claim
  The Defendants were found to have breached their duty of care to the Plaintiffs where damages were suffered. The High Court awarded compensation in the sum of RM 1.5 million to the Plaintiffs. The High Court did not deal with the defence of limitation raised by the Defendants.

• The Court of Appeal Overturned the High Court’s Decision
  The Court of Appeal found that the Plaintiffs’ claim was statutorily time-barred under Section 6(1)(a) of the Act as the cause of action arose on the date when the Plaintiffs executed the SPA in the year 2004, where they would have suffered damages by virtue of being owners of an encumbered property. The appeal was determined based on the defence of limitation, and the High Court’s findings on the Defendants’ breach of duty were undisturbed. 

Decision and Findings by the Federal Court

• The Federal Court Unanimously Allowed the Plaintiffs’ Appeal, Restored the High Court’s Decision, and Set Aside the Decision of the Court of Appeal

• A “Cause of Action” Must be Complete Before the Limitation Period Runs
  Having analysed case law, the Federal Court summarised that a “cause of action” normally accrues when there is (1) in existence a person who can sue and another who can be sued, (2) when all the facts have happened which are material to be proved to entitle the plaintiff to succeed and (3) when damage is suffered.

• Ascertainable or Actual Loss Must be in Existence for the Limitation Period to Run
  In tortious claims, time runs from when damage occurs and not when the negligent act or omission occurred. Prospective loss is not enough to compel a plaintiff to institute proceedings before the existence of his or her loss is ascertained or ascertainable. The Defendants’ negligence in the preparation of the SPA only gave rise to a contingent loss, dependent on whether Bank Islam would enforce the charge. The Federal Court found that the Plaintiffs suffered damage on 2 September 2014 when Bank Islam required them to pay the redemption sum or the property would be auctioned off and the limitation period would run from such date.

• Knowledge or Discoverability of a Breach is Material to Determine if a “Cause of Action” Had Accrued
  There was evidence to show that the Plaintiffs had been continuously misled and misrepresented by the Defendants regarding the true facts. While Section 6A of the Act has now substantively addressed the element of “knowledge and discoverability of a breach” and the Plaintiffs’ claim was brought before the introduction of this provision of the Act, the Federal Court held that if time ran from the date of preparation of the SPA, it is clear that even six years after that date, the Plaintiffs were in no position and could not have, with reasonable diligence, knowing that the Defendants were negligent in its preparation.

Practical Consideration

• Act With Reasonable Promptitude to Enforce Your Rights
  It is important for any person with a claim to not sit on their rights and to act with reasonable promptitude to enforce such rights.

• Understand the Limitations of Section 6A of the Act
  Not all breaches may be evident until damage is eventually suffered. Section 6A of the Act has now introduced the element of knowledge and discoverability of negligence in this instance. However, Section 6A of the Act also provides for a timeline of three (3) years from the earliest date on which the plaintiff had the knowledge required to bring an action and a limitation of fifteen (15) years from the date on which the cause of action first arose. 

• Be Mindful to Plead Limitation as a Defence
  Notwithstanding the Federal Court’s decision, it is important to appreciate the importance of pleading a defence of limitation. Limitation does not extinguish rights; however, a plea in limitation bars a plaintiff’s access to seek remedies for such rights.