Contract law refresher - When does time start running for a claim under an indemnity?

A consideration of the time frame within which a claim must be brought under an indemnity.
Submitted Applicable Law Topic 21 August 2013 UK, Hong Kong SAR, Canada Commercial Projects Construction Sector Focus Contact Energy and Infrastructure Simon Morgan, Bree Miechel 65 Views 0 Favourites

An indemnity, provided under contract, is an undertaking by a party to cover specified liabilities of the other contracting party. Should the liability be realised, the party providing the indemnity should compensate the other for losses on a dollar-for-dollar basis, subject to exclusions that may be specified. As an indemnity is an agreement, the limitation period for a claim under an indemnity is the same as a claim for contractual breach; they are both, subject to limited exceptions such as fraud, six years (and 12 years for an agreement executed as a deed). When the obligation under the indemnity arises however, and so time starts to run, depends upon the wording of the provision and may be later than a claim for a contractual breach. So, for example, where say A has sold a building to B and A warrants that there are no defects in the building and indemnifies B against losses resulting from any defects, the date when the period for recovery under the indemnity starts running may be later than the date when the period for bringing a claim for breach of warranty commences. The obligation to indemnify in this scenario likely arises when the losses resulting from the defects crystallise and are ascertained (for example following a damages award in legal proceedings). The result could be different if A had indemnified B against defective works or claims for defective works. The limitation period for a claim in tort is generally six years from damage being suffered as a result of the negligent act or omission or, in some cases, three years from the time when the material facts about the loss and the cause of action should reasonably have been known (with a a 15-year long-stop date). However, where that tortious act or omission gives rise to a claim under an indemnity, time may start to run from a later date (for example, when the loss or damage becomes actual and measureable following legal proceedings).
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The key case establishing the position on indemnities under English law is Telfair Shipping Corp v Inersea Carriers SA (The Caroline P) [1985] 1 WLR 553 (Telfair). In this case the court considered previous conflicting authorities on when the limitation period in respect of an indemnity begins to run. The decision highlights that the outcome will hinge delicately on the courts interpretation and classification of the indemnity.

The Telfair case

It was determined in Telfair that there were at least three ways for Party A, which has become liable to Party B, to obtain redress from a third party, Party C.

(1) Claims based on a breach of contract For a claim for breach of contract (or warranty), time starts running from the date of the contractual breach. (2) Claims based on an express indemnity The law is more complex where a claim is brought in respect of an express indemnity in a contract. The time from which a cause of action accrues depends on whether the indemnity clause is characterised as (i) a general indemnity; or (ii) an indemnity against liability. The former is an obligation to cover against the consequences/losses arising as a result of a liability, whereas the latter is an obligation to cover against a specific liability such as the death or personal injury of a third party or infringement of third party intellectual property rights. For a general indemnity, time starts to run when liability is established and (consequences) ascertained. For an indemnity against liability, time starts to run at the incurring of the liability (before discharge or determination of the consequences of the liability). In such a situation, a liability may be incurred even when the liability is still merely contingent. As a result, liability under an indemnity may extend for an indefinite period. Whether an indemnity is general or against liability can be a matter of construction by the courts (if it is drafted vaguely), so it is important to precisely capture the purpose of the indemnity in the contract drafting. (3) Claims based on an implied indemnity Alternatively, in the absence of an express indemnity clause in an agreement, a claim may arise, in equity, as a result of an implied indemnity. Under common law, an implied indemnity is recognised as a general indemnity. Thus, a cause of action arises only when liability is established and ascertained. The table below sets out the limitation period for each type of action, along with an example of each.

Type of action

Example Breach of contractual warranty to

Limitation period/time from which cause of action accrues

Contract

comply with all applicable health and safety laws.

Six years from the date of the breach.2

Express indemnity: general indemnity clause Express indemnity: indemnity against liabilities

Indemnity against all costs, losses and expenses incurred as a result of death or personal injury of third parties. Indemnity against death or personal injury of a third party.

Six years from the date on which the partys liability to a third party has been established and loss ascertained.3

Six years from the date death or personal injury was sustained.4

Non-contractual indemnity against Implied indemnity negligence in failing to act in relation to a known hazard on site.

Six years from the date on which the project companys liability to the third party has been established and loss ascertained (this is the same as the limitation period under an express general indemnity).

The Telfair case has been followed in various UK cases including the more recent case of Heath Lambert Ltd v Sociedad de Corretaje de Seguros [2004] EWCA Civ 792.

Other common law jurisdictions

The position under Hong Kong law is very clear. The case of Grand Pacific Equity Ltd v RSH Sports (HK) Ltd [2008] HKEC 850 confirmed the line of authorities in Telfair. In this case the Hong Kong court, having found that there was a general indemnity, held that the limitation period did not start to run in respect of claims arising from the indemnity until liability had crystallised and been ascertained. The recent Canadian cases are based on the express wording of the Canadian statute. For example, Canaccord Capital Corp v Roscoe, 2013 ONCA 378 (Roscoe) in Ontario confirms that the limitation period under section 18 of the Ontario Limitation Act 2002 in Canada applies to an indemnity claim arising out of tort and contract and that limitation period commences upon the day on which the first alleged wrongdoer was served with the claim in respect of which indemnity is sought. The earlier case of Penhold (Town) v Boulder Contracting Ltd (2009) ABQB 550 (Penhold) meanwhile strictly applies section 11 of the Limitations Act in Alberta. This provides that the limitation period for a party making an indemnity claim commences upon initial discovery of the damage or potential liability (in which case the indemnified party may need to assert a claim and/or issue protective proceedings before its liability has been established). The Scottish court decided in the case of Scott Lithgow v Secretary of State for Defence 1989 SC (HL) 9 (Scott Lithgow), that the cause of action for an indemnity claim also began as soon as the original loss, damage or liability was discovered. The position in the Scott Lithgow case has been followed in another Scottish case, Flynn v UNUM Ltd 1996 SLT 1067. It is important to note, however, that the Penhold, Roscoe and Scott Lithgow cases were based on interpretations of Canadian and Scottish legislation respectively, and so can be distinguished from the English law position.

Conclusion
The period of commencement of limitation periods, as set out in the Telfair case, is firmly established in English law. Foreign case law contrary to this position bears little authority on, and is unlikely to be welcomed by, the English courts. It is important for clients to understand the potential consequences of the types of indemnities they have agreed, especially as the consequences may only materialise several years after the contract is entered into. In cases where time starts running for an indemnity claim prior to the losses they are intended to cover being ascertained, indemnified parties should consider asserting a claim and/or issuing a protective proceeding before their liability has been established.

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Law Society v Sephton & Co (a firm) and others [2006} 2 AC 543 Section 5 of the Limitation Act 1980 R. & H. Green & Silley Weir Ltd., v British Railways Board (Note) [1985] 1 W.L.R. 570 Bosma v Larsen [1966] 1 Lloyds Rep 22 This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.

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