Limitation of Actions Consultation - Law Commission

promise by the guarantor that the debtor will perform the principal contract. The
general rule however is subject to the express terms of the guarantee. For
example, if the promise made by the guarantor is to pay instalments upon default
by the debtor the guarantee will usually state that the guarantor need not make
those payments until a demand is made on the guarantor. In that case the cause of
action does not accrue until demand is made. 20
3.10 Contracts of indemnity, the most important being insurance contracts, are more
problematic. When the cause of action accrues turns on the construction of the
particular contract. In contracts to insure against loss suffered by the assured, the
usual rule is that the cause of action accrues when the loss was incurred. 21
Where
the indemnity is against liability to third parties, the general rule today is that the
indemnified party may commence proceedings against the indemnifier when the
extent of his or her liability is established by judicial decision, arbitration, or
binding settlement. 22
However that rule is subject to the construction of the
contract of indemnity. Sometimes that will mean that the indemnifier will become
liable as soon as the indemnified party becomes liable, that is, even before the
quantum of that liability is determined. 23
In other cases the contract of indemnity
may only provide an indemnity for amounts paid by the indemnified party. In that
case no liability arises as against the indemnifier until an amount has been paid by
the indemnified party. 24
3.11 There is no discretion to disapply or extend the period and no long-stop in relation
to standard actions for breach of contract.
20 See Bank of Baroda v Patel [1996] 1 Lloyd’s Rep 391; J Phillips and J O’Donovan, The
Modern Contract of Guarantee (3rd ed 1996), pp 495 - 503; A McGee, Limitation Periods
(2nd ed 1994), p 180; R Redmond-Cooper, Limitation of Actions (1992), p 39; T Prime and
G Scanlan, The Modern Law of Limitation (1993), pp 84 - 86.
21 Firma C-Trades SA v Newcastle Protection and Indemnity Association, The Fanti and the Padre
Island [1991] 2 AC 1, 35 - 36.; Ventouris v Mountain, The Italia Express [1992] 2 Lloyd’s Rep
281, 285, 291 - 292; Callaghan v Dominion Trust Insurance Co [1997] 2 Lloyd’s Rep 541. See
Colinvaux, Law of Insurance (7th ed 1997), para 9.15.
22 See Re Richardson ex parte Governors of St Thomas’s Hospital [1911] 2 KB 705, 709 - 710,
Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363; County and District
Properties Ltd v C Jenner & Son Ltd [1976] 2 Lloyd’s Rep 728; Telfair Shipping Corp v Inersea
Carriers SA, The Caroline P [1985] 1 All ER 243; Bradley v Eagle Star Insurance Co Ltd
[1989] AC 957. Cf Collinge v Heywood (1839) 9 A & E 633, 112 ER 1352; Bosma v Larsen
[1966] 1 Lloyd’s Rep 22. See also R Redmond-Cooper, Limitation of Actions (1992), pp 39
- 40.
23 See eg, Bosma v Larsen [1966] 1 Lloyd’s Rep 22.
24 In Firma C-Trades SA v Newcastle Protection and Indemnity Association, the Fanti and the Padre
Island [1991] 2 AC 1, the House of Lords held that the general rule would be ousted by a
“pay to be paid” clause. See A McGee, Limitation Periods (2nd ed 1994), pp 175 - 178; J
Phillips and J O’Donovan, The Modern Contract of Guarantee (3rd ed 1996), pp 502 - 503;
Redmond-Cooper, Limitation of Actions (1992), pp 39 - 41; T Prime and G Scanlan, The
Modern Law of Limitation (1993), pp 89 - 91.
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