Limitation period under Fair Trading Act clarified

The Supreme Court judgment in Commerce Commission v Carter Holt Harvey [2009] NZSC 120 provides important guidance on the applicable limitation period for civil claims brought for breach of the Fair Trading Act 1986 (the Act).

It confirms that New Zealand courts are unlikely to grant pre-trial applications to strike out claims under the Act on the ground that they are time-barred.  Instead, defendants will usually have to wait until the substantive trial before the court will consider any limitation defence.

This Brief Counsel looks at the Supreme Court’s decision, how it has clarified the law, and what it means for claimants and defendants in Fair Trading Act litigation.

The facts

On 27 October 2006, the Commerce Commission brought a proceeding against Carter Holt Harvey alleging breach of the Fair Trading Act.  Specifically, the Commission alleged that Carter Holt had for a number of years misrepresented timber it sold as being of a certain grade when in fact it was of a lesser grade.  The Commission sought orders requiring Carter Holt to refund to end users the difference between what they paid for the timber and the fair market value for that timber.

Carter Holt’s limitation argument

This was not the first court action the Commission had brought against Carter Holt on this matter.  The Commission had laid charges against the company under the Act in 2006 after investigating a complaint from an industry source for alleged mislabelling of its timber.  Carter Holt pleaded guilty on 12 October 2006. 

As part of the initial investigation, a staff member of the Commission made an affidavit in support of an application for a search warrant.  The affidavit referred to various testing that the Commission had undertaken of Carter Holt’s timber.  In his affidavit, the staff member suggested that the testing indicated tampering by Carter Holt with its stress-grading machines. 

That affidavit was made on 24 October 2003.  However, the Commission did not bring its civil claim until 26 October 2006.  That delay potentially brought into play the limitation period under s 43(5) of the Fair Trading Act 1986, which provides: 

An application under subsection (1) may be made at any time within 3 years after the date on which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered.

Carter Holt’s argument was that the Commission’s civil claim – which was brought as “an application under subsection (1)” – was out of time, because the information contained in the Commission’s affidavit of 24 October 2003 showed that the Commission must have known, at that time, of the loss or damage for which it was now seeking relief in its civil claim.  Since the civil claim was filed on 26 October 2006, Carter Holt argued that the Commission was two days too late with its claim and that the claim should be struck out as time-barred. 

Carter Holt’s argument was unsuccessful before Asher J in the High Court, but successful on appeal to the Court of Appeal.  However, in a unanimous decision, the Supreme Court reversed the Court of Appeal and restored the decision of the High Court. 

The Supreme Court decision: three questions

Tipping J gave the majority judgment in the Supreme Court.  In His Honour’s view, three questions arose on the interpretation of the limitation defence provided in s 43(5). 

The first question arose because s 43 allows any person to bring an application for relief under the Act, irrespective of whether that person is the one who has suffered the loss or damage for which relief is sought.  Accordingly, where an application is brought on behalf of others who have suffered loss or damage, the question arises whose knowledge counts for the purposes of determining whether the loss or damage has been (or ought reasonably to have been) discovered.  Does the limitation period begin to run from when the applicant discovers the loss or damage?  Or does it begin to run from when the loss sufferer discovers it? 

Second, what does the expression “likelihood of loss or damage” mean, as it is used in s 43(5)? 

Third, what degree of awareness of the loss or damage is needed before it can be said to have been “discovered” for the purposes of the limitation defence in s 43(5)? 

The first question – whose knowledge?

As Tipping J noted in his judgment, three different views were taken in the courts below on the question of whose knowledge was relevant to when time begins to run under the limitation period in s 43(5).  In the High Court, Asher J said that the relevant knowledge was that of the person who suffered the loss or damage.  In the Court of Appeal, Hammond J said that the relevant knowledge was that of the person making the application under s 43(1), which in this case was the Commission.  The other two Judges in the Court of Appeal, Chambers and Baragwanath JJ, said that it was a combination of these two approaches; time would start to run whenever either the applicant or the loss sufferer discovered or ought reasonably to have discovered the damage. 

Tipping J ruled that Hammond J had reached the correct view.  In short, the person who must discover the loss or damage is the person making the application under s 43(1).  Accordingly, once this person has discovered, or should reasonably have discovered, the loss or damage for which the Fair Trading Act claim is brought, the three-year limitation period under s 43(5) will begin to run. 

Tipping J recognised the theoretical possibility that, if the limitation period was only triggered when the applicant discovered the loss, a loss sufferer who was already time-barred could circumvent the limitation period by getting somebody else who did not know of the loss to bring a Fair Trading Act claim on the loss sufferer’s behalf.  However, His Honour considered that there was no basis on which a court would grant relief under the Fair Trading Act 1986 where the person who had actually suffered the loss was already time-barred, even if a representative plaintiff, suing on that person’s behalf, was not strictly time-barred. 

The second question – “likelihood of loss or damage”

In relation to the second question, Tipping J confirmed the analysis of Asher J in the High Court that the phrase “likelihood of loss or damage” in s 45 is merely descriptive of loss or damage that has not yet occurred, as opposed to establishing a standard against which the incurring of past loss or damage is to be measured.  Accordingly, time starts running when the applicant discovers or ought to have discovered either that loss or damage has already occurred or that loss or damage is likely to occur in the future.   

When time runs from will depend on the type of loss for which relief is sought.  If relief is sought for loss or harm already suffered, time will start running from actual or constructive discovery of that past loss.  If relief is sought in relation to likely future loss, time will run from discovery of the likelihood of that future loss. 

The third question – the likelihood of loss necessary

The third issue was how likely the occurrence of loss should be before it could be said to have been discovered or that it ought to have been discovered.  In the case of future loss, “likelihood” set the standard for discovery, as well as being descriptive of it.  Although those words did not appear in relation to past loss, Tipping J considered that there was merit in adopting the same standard for both past and future types of loss.  In this context, “likelihood” meant loss that was more probable than not either to have occurred or to occur in the future. 

Tipping J also confirmed that the applicant’s knowledge (and the concept of probability) extends to the knowledge that loss has been occasioned by a contravention of the Act.  It is only that type of loss or damage that is relevant.  Accordingly, time runs only from either when the applicant becomes aware that it is more probable than not that damage has occurred or will occur as a result of a contravention of the Act or when the applicant ought to have been aware of it.  For time to start running, however, Tipping J considered that it was not necessary for the applicant to have become aware of the actual loss or damage as ultimately established.  Consistent with general limitation practice, Tipping J held that it was sufficient that the applicant become aware of the likelihood that some more than minimal loss or damage has occurred, or will occur.   

In interpreting s 43(5) in this manner, Tipping J expressly considered, and rejected, the approach of the House of Lords to the Limitation Act 1980 (UK) in Haward v Fawcetts (a firm) [2006] 1 WLR 682, which adopted a lower threshold.  Tipping J emphasised that the interpretation of limitation provisions would turn on the particular language used (the provision considered in Haward being substantially more detailed than that in s 43(5)) and the context.  Tipping J’s discussion of this issue suggests that, outside the consumer protection context, a balance less favourable to plaintiffs may be appropriate.  That balance will, however, ultimately (and unsurprisingly) be driven by the statutory text. 

Application to the facts

Applying this approach to s 43(5) to the present facts, Tipping J held that, to succeed on its strike-out application, Carter Holt had to show that the Commission knew, or ought to have known, on or before 26 October 2006, that some person was likely to have suffered loss or damage as a result of a probable breach of the Fair Trading Act by Carter Holt.  Unless Carter Holt could show that there was no reasonable possibility that the Commission’s claim was brought within time, His Honour held that Carter Holt’s strike-out application could not succeed and the Commission’s claim (as well as Carter Holt’s limitation defence) would have to proceed to a full trial. 

In Tipping J’s view, Carter Holt had failed to show that there was no reasonable possibility that the Commission’s claim was brought within time.  Carter Holt’s argument was essentially based on information contained in the Commission’s search warrant affidavit of 23 October 2003.  The affidavit stated that the Commission had undertaken testing on three packets of Carter Holt timber and that those packets had failed to achieve a particular value set by the relevant product standards. 

However, the product standards did not require that every single packet of timber should achieve the required value, but merely that a “population” comprising all the timber of the relevant grade should, on average, meet that value.  By definition, if the timber as a whole needed only to average that value, some samples would be below and some would be above.  Exactly how much timber constituted a “population” for the purposes of the standard was not defined in the standard and was a point of contention between the Commission and Carter Holt.  Indeed, Carter Holt’s own statement of defence had alleged that the reports obtained by the Commission were based on an “insufficient sample size” to enable any conclusion to be reached on whether Carter Holt’s timber generally complied or did not comply with the relevant product standard. 

In those circumstances, Tipping J found that it could not be said that the Commission should have known that a breach had probably occurred on the basis of testing undertaken on only three packets of timber, because the sample size was too small.  Accordingly, the strike-out application was declined and the Commission’s claim (as well as Carter Holt’s limitation defence) was left to be determined at trial. 

Elias CJ’s minority decision

In a minority decision, Elias CJ concurred with the decision to decline Carter Holt’s strike-out application, but took a different view on the first and third questions identified by Tipping J.  On the first question, and contrary to the other members of the Supreme Court, the Chief Justice took the view that discovery by either the applicant or the loss sufferer triggers the limitation period under s 43(5).  On the third question, the Chief Justice stated that she did not wish to be taken as agreeing with Tipping J’s analysis. 

Consequences of the decision

The Supreme Court’s decision provides useful guidance for determining when the limitation period under s 43(5) of the Fair Trading Act 1986 will begin to run.  In short, unless the person claiming under the Act knows or ought to have known within three years of bringing the claim that the loss or damage for which relief is sought had probably occurred, the application will still be in time.  That approach is particularly appropriate in legislation that has a consumer protection purpose, and will be welcomed by plaintiffs.  

The corollary, of course, is that the Supreme Court’s approach makes it very difficult for defendants to Fair Trading Act claims to avoid going to trial, even if it seems tolerably clear that the claim suffers from a limitation problem.  Unless a defendant can show before trial that there is no reasonable possibility that the claim is within time, it will be permitted to proceed to trial and any limitation defence will similarly have to be considered on its merits at that trial.  Any limitation defence turning on a reasonably disputed question of fact (and most do) will not appropriately be the subject of a strike-out application on a pre-trial basis.  In this regard, the Supreme Court decision confirms the general trend towards adopting a high threshold when seeking to strike out claims before trial on limitation grounds.  Accordingly, there will be few cases where defendants could successfully raise a limitation period as a silver bullet to strike a claim out on a pre-trial basis. 

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Related topics: Competition, regulatory & antitrust; Litigation & dispute resolution; Fair trading

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