Michaelmas Term [2017] UKSC 75 On appeal from: [2016] CSIH 16

JUDGMENT
Gordon and others, as the Trustees of the Inter
Vivos Trust of the late William Strathdee Gordon
(Appellants) v Campbell Riddell Breeze Paterson
LLP (Respondent) (Scotland)
before
Lord Neuberger
Lord Mance
Lord Sumption
Lord Reed
Lord Hodge
JUDGMENT GIVEN ON
15 November 2017
Heard on 19 July 2017
Appellants Respondent
Robert Howie QC David Johnston QC
Robert Sutherland Adam McKinlay
(Instructed by Drummond
Miller LLP
)
(Instructed by Brodies
LLP
)
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LORD HODGE: (with whom Lord Neuberger, Lord Mance, Lord Sumption
and Lord Reed agree)
1. When the law extinguishes obligations as a result of the effluxion of time it
is important that there is certainty as to when the clock is started. Yet many within
the legal profession in Scotland have been unsure about this important matter. This
is another appeal about the meaning of the provisions of the Prescription and
Limitation (Scotland) Act 1973 (“the 1973 Act”) concerning the short negative
prescription. Counsel for the appellants informed the court that several cases have
been sisted in the Court of Session to await the outcome of this appeal.
2. This appeal proceeds on facts which the parties have agreed solely for the
purpose of determining the question of prescription and which may be summarised
briefly. The appellants (“the trustees”) are the trustees of the inter vivos trust of the
late William Strathdee Gordon (“the trust”). The trust owns farmland, comprising
three fields near the village of Killearn, which the trustees acquired because of its
long-term potential for residential development. The three fields are a grazing field,
a field of about 40 acres and a field of about 50 acres.
3. The grazing field was originally let out by the trust by a series of seasonal
grazing lets to a farming partnership of Messrs A & J C Craig (“the farming
partnership”) which had two partners. This lease continued by tacit relocation from
about 1983. The 40-acre and 50-acre fields were let out to the farming partnership
under separate leases in 1981 and 1983 respectively. After the expiry of the original
terms of let of those fields the trust entered into various minutes of agreement, which
were prepared by their solicitors, who were the predecessor firm to the respondents
in this appeal. Those minutes of agreement purported to continue the original leases
of those fields. In about August 1992 the solicitors became aware that Mr Andrew
Craig, one of the two partners, had retired from the farming partnership.
Notwithstanding that knowledge, the minutes of agreement in 1992 and 1998
described the tenant as the farming partnership and John Campbell Craig the sole
proprietor and trustee for the firm. Under the 1998 agreements the ish (expiry date)
of the lease of each of the two fields was 10 November 2003.
4. It is a matter of agreement that by 2003 the leases for all three fields were
agricultural holdings for the purposes of the Agricultural Holdings (Scotland) Act
1991 (“the 1991 Act”).
5. In 2003 the trustees instructed Mr McGill, who was both a trustee of the trust
and a partner in the firm of solicitors, to serve on the tenant notices to quit the three
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fields at the term of 10 November 2003. The tenant served counter notices under the
1991 Act. After receiving advice from counsel that the notices to quit the 40-acre
field and 50-acre field were ineffective as they did not give the period of notice
which the 1991 Act required, the solicitors served further notices to quit in respect
of the three fields dated 8 November 2004 requiring the tenant to remove on 10
November 2005. In each of those notices to quit the tenant was identified as “the
firm of Messrs A & J C Craig and John C Craig, sole proprietor of and trustee for
said firm”. The notice to quit the 40-acre field described it as being subject to a lease
dated 22 September and 7 and 8 October 1981 as amended by subsequent
agreements. Similarly the notice to quit the 50-acre field described it as being subject
to a lease dated 5 January and 14 February 1983 as so amended.
6. On 1 December 2004 Mr Richard Leggett, a partner of the solicitors, wrote a
long letter to Mr William Gordon, one of the trustees, in which he explained that the
solicitors had to withdraw from acting for the trust because of a conflict of interest
caused by difficulties which might result from a failure to terminate the leases of the
fields before their expiry dates which had allowed the tenant to continue to occupy
the fields by tacit relocation. The solicitors suggested that those difficulties might
require the payment of money to Mr John Craig to get him to cede possession of the
fields. In response, the trustees did not require the solicitors to cease acting for them
and continued to instruct them. But, after the tenant did not cede possession of the
fields on 10 November 2005, the solicitors wrote to the trustees on the same day to
withdraw from acting for the trust in relation to the leases at Killearn, again citing
the difficulties which they foresaw would arise from their earlier failure to prevent
tacit relocation. Thereafter Mr McGill resigned as a trustee.
7. The trustees then instructed Anderson Strathern LLP, who on 9 February
2006 applied to the Scottish Land Court seeking the removal of the tenant from each
of the three fields. It is an agreed fact that by 17 February 2006, at the latest, the
trustees had incurred material expense in instructing Anderson Strathern to pursue
those applications. The tenant defended the applications. In a decision dated 24 July
2008 the Scottish Land Court gave effect to the notice to quit in relation to the
grazing field but refused to give effect to the notices to quit relating to the other two
fields, because the notices were inaccurate in their description of both the tenant and
the relevant lease. As a result, the 40-acre field and the 50-acre field remain subject
to leases that are agricultural holdings, thus preventing the trustees from developing
them.
The legislation
8. As is well known, section 6 of the 1973 Act, when read with sections 9 and
10 of that Act, creates the short negative prescription by providing that if an
obligation has subsisted for a continuous period of five years after “the appropriate
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date” without the creditor or someone on his behalf having made a relevant claim or
the debtor or someone on his behalf having relevantly acknowledged the subsistence
of the obligation, the obligation is extinguished at the expiration of that period.
Section 6(3) provides that the appropriate date in relation to an obligation arising
from a breach of contract is a reference to the date when the obligation became
enforceable.
9. This appeal is concerned with section 11 of the 1973 Act, which defines when
an obligation to make reparation becomes enforceable. It provides:
“(1) Subject to subsections (2) and (3) below, any obligation
(whether arising from any enactment, or from any rule of law
or from, or by reason of any breach of, contract or promise) to
make reparation for loss, injury or damage caused by an act,
neglect or default shall be regarded for the purposes of section
6 of this Act as having become enforceable on the date when
the loss, injury or damage occurred.”
(2) Where as a result of a continuing act, neglect or default
loss, injury or damage has occurred before the cessation of the
act, neglect or default the loss, injury or damage shall be
deemed for the purposes of subsection (1) above to have
occurred on the date when the act, neglect or default ceased.
(3) In relation to a case where on the date referred to in
subsection (1) above (or as the case may be, that subsection as
modified by subsection (2) above) the creditor was not aware,
and could not with reasonable diligence have been aware, that
loss, injury or damage caused as aforesaid had occurred, the
said subsection (1) shall have effect as if for the reference
therein to that date there were substituted a reference to the date
when the creditor first became, or could with reasonable
diligence have become, so aware.”
(Emphasis added)
The court proceedings
10. On 17 May 2012 the trustees commenced a legal action against the
respondents by serving on them a summons seeking damages for breach of an
implied term of the contract between the trustees and the solicitors, that the latter
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would exercise the degree of knowledge, skill and care expected of a reasonably
competent solicitor. The breach which the trustees allege is that the solicitors failed
to identify correctly both the tenant and the applicable lease in the notices to quit
dated 8 November 2004 relating to the 40-acre field and the 50-acre field. Among
the sums claimed by the trustees in this action are the fees and outlays paid to the
solicitors and to Anderson Strathern relating to the attempt to obtain vacant
possession of the two fields and damages for the enhanced value of the land and the
opportunity for the trust to exploit the fields’ potential for development both of
which were lost through the failure to recover possession of them.
11. The respondents pleaded that any obligation on them to make reparation had
prescribed because the trustees had not raised the action within five years of the date
when they had suffered loss, which, the respondents submitted, was when the
solicitors served the defective notice to quit in November 2004 or in any event when
the tenant failed to remove from the fields on 10 November 2005. They submitted
that the trustees had had knowledge of having suffered loss when they learned that
the tenant would not voluntarily cede possession of the fields. After hearing
evidence in a preliminary proof on prescription at which the parties had agreed that
the averments of breach of contract and loss were to be treated as proven, Lord Jones
upheld the plea of prescription in an opinion dated 25 March 2015 ([2015] CSOH
31). In so doing, he rejected the trustees’ argument that the prescriptive period did
not begin until the Scottish Land Court issued its decision (ie 24 July 2008), which,
according to the trustees, was the date on which they first knew that they had
suffered loss. He held that the prescriptive period began when the trustees knowingly
became liable for legal fees and outlays in pursuit of vacant possession of the fields.
As it was agreed that the trustees had incurred material expense in relation to the
Scottish Land Court application by 17 February 2006, the five-year prescriptive
period had run its course before they commenced the legal proceedings against the
respondents (on 17 May 2012). Lord Jones therefore absolved the respondents from
the trustees’ claims.
12. On 8 March 2016 an Extra Division of the Inner House (Lady Paton, Lord
Bracadale and Lord Malcolm) refused the trustees’ appeal. Lord Malcolm wrote the
leading opinion and the other judges wrote concurring opinions ([2016] CSIH 16;
2016 SC 548). In his opinion, Lord Malcolm analysed the judgment of the Supreme
Court in David T Morrison & Co Ltd (t/a Gael Home Interiors) v ICL Plastics Ltd
2014 SC (UKSC) 222; [2014] UKSC 48 (“Morrison v ICL”) which I discuss below.
He concluded that section 11(3) of the 1973 Act postponed the start of the
prescriptive period only when the damage was latent by requiring that the creditor
should have actual or constructive knowledge of the occurrence of damage or
expenditure, which was viewed as an objective fact. He held that the prescriptive
period ran from the time the trustees incurred liability for legal fees notwithstanding
that they did not then know that their application to the Scottish Land Court would
fail. In a short judgment with which Lord Bracadale agreed, Lady Paton added that
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the trustees had gained sufficient knowledge that they had suffered loss when they
received the solicitors’ letter of 10 November 2005.
13. The trustees appeal to this court with the permission of the Inner House,
which it granted on 1 June 2016.
Discussion
(i) The legislation
14. It is clear from the opening phrase of section 11(1) – (“Subject to subsections
(2) and (3) below”) – that that subsection sets out the general rule that an obligation
to make reparation becomes enforceable when the loss, injury or damage occurred.
Subsections (2) and (3) modify the general rule in the circumstances in which they
apply. It is also clear that in each of the subsections Parliament has chosen to use
the same words – “loss, injury or damage” – to describe the detriment suffered by the
creditor.
15. The House of Lords and this court have considered those words in their
statutory context in ascertaining the appropriate date for the commencement of the
five-year prescription in two cases.
16. First, in Dunlop v McGowans 1980 SC (HL) 73, which concerned the failure
by solicitors timeously to serve a notice to quit on a tenant, Lord Keith of Kinkel in
the leading speech (p 81) explained that the obligation to make reparation for loss,
injury or damage is a single and indivisible obligation and that that obligation arose
as soon as there was the concurrence of a legal wrong and loss resulting from that
wrong. In that case the obligation to make reparation became enforceable on the date
when, but for the solicitor’s omission, the client landlord would have obtained
vacant possession of his premises. The prescriptive period under section 11(1) of
the 1973 Act began to run then although the landlord’s losses, which resulted from
the failure to get vacant possession, could only be estimated at that date.
17. Secondly, in Morrison v ICL, which concerned observable physical damage
to Morrison’s shop caused by an explosion in the neighbouring business premises
of ICL, this court held that, for the prescriptive period to begin under section 11(3)
of the 1973 Act, the creditor needed to be aware (actually or constructively, if the
creditor could with reasonable diligence have been aware) only of the occurrence of
the loss or damage and not of its cause. In other words, section 11(3) applies in the
case of latent damage, by postponing the start of the prescriptive period until the
creditor is aware of the physical damage to his property. The focus of the court’s
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judgment in that case was on the words “caused as aforesaid” in subsection (3). They
are a reference back to subsection (1) which speaks of loss, injury or damage “caused
by an act, neglect or default”. The phrase “caused as aforesaid” thus connects the
loss to the cause of action. But the phrase is adjectival; it does not require additional
knowledge on the part of the creditor. The subsection falls to be read as if it said:
“the creditor was not aware … that loss, injury and damage, which had been caused
as aforesaid, had occurred”; thus it, like subsections (1) and (2), focuses on the
occurrence and timing of loss (viz Lord Reed paras 16 and 25, Lord Neuberger para
47).
18. In Morrison v ICL this court did not have to address the question which this
appeal raises, namely whether in section 11(3) the creditor must be able to recognise
that he has suffered some form of detriment before the prescriptive period begins.
In Morrison v ICL the property damage was manifest on the date of the explosion.
But where a client of a professional adviser suffers financial loss by incurring
expenditure in reliance on negligent professional advice, the client, when spending
the money, will often be unaware that that expenditure amounts to loss or damage
because of circumstances, existing at the date he or she spends the money, of which
the client has no knowledge. A question which the current appeal raises is whether
section 11(3) starts the prescriptive clock when the creditor of the obligation is aware
that he or she has spent money but does not know that that expenditure will be
ineffective.
19. The answer to that question lies in interpreting the words “loss, injury or
damage” in subsection (3) in the context of section 11 as a whole. In section 11(1)
the phrase “loss, injury or damage”, which I have emphasised in para 9 above, is a
reference to the existence of physical damage or financial loss as an objective fact.
Thus if a person’s building is damaged in an explosion, or a garden wall is damaged
as a result of subsidence, there is physical damage which is enough to start the clock
under that subsection, unless either or both of subsections (2) or (3) apply. No
question arises under subsection (1) as to the creditor’s knowledge of that objective
fact. As Lord Keith stated in Dunlop v McGowans (p 81):
“The words ‘loss, injury or damage’ in the last line of the
subsection refer back to the same words in the earlier part and
indicate nothing more than the subject-matter of the single and
indivisible obligation to make reparation.”
Thus if, as a result of a breach of contract, a person purchases defective goods, incurs
expenditure or fails to regain possession of his property when he or she wished to
do so, the section 11(1) clock starts when the person acquires the goods, the
expenditure is incurred or when the person fails to obtain vacant possession of the
property.
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20. Section 11(3), which postpones the start of the prescriptive period, is
concerned with the awareness of the creditor. But that which the creditor must
actually or constructively be aware of before the prescriptive period begins is the
same “loss, injury or damage” of which section 11(1) speaks, because subsection (3)
uses the same language and also refers back to subsection (1) when it speaks of
“loss, injury or damage caused as aforesaid”. The phrase “loss, injury or damage”
must have the same meaning in each of the subsections of section 11. There is
therefore no scope for reading any additional meaning into those words in subsection
(3).
21. It follows that section 11(3) does not postpone the start of the prescriptive
period until a creditor of an obligation is aware actually or constructively that he or
she has suffered a detriment in the sense that something has gone awry rendering
the creditor poorer or otherwise at a disadvantage. The creditor does not have to
know that he or she has a head of loss. It is sufficient that a creditor is aware that he
or she has not obtained something which the creditor had sought or that he or she
has incurred expenditure.
22. This approach is harsh on the creditor of the obligation, where the creditor
has incurred expenditure which turns out to be wasted or fails to achieve its purpose,
because the circumstances when the prescriptive period begins may not prompt an
enquiry into the existence or likelihood of such loss. Thus a person may begin a
legal action and incur expenditure on legal fees on the basis of negligent legal advice
or he or she may purchase a house at an over-value as a result of the negligent advice
of a surveyor. In each case the person may be aware of the expenditure but not that
it entails the loss. But it offers certainty, at least with the benefit of hindsight. The
trustees’ formulation by contrast would create uncertainty. If it were necessary in
order for the prescriptive period to begin that the creditor be aware that something
had gone awry and that he or she has suffered a detriment in the form of wasted
expenditure, would an adverse judgment at first instance be sufficient to establish
such an awareness of detriment if there were strong grounds for an appeal? The
result might be prolonged uncertainty. Further, a requirement that there be an
awareness of a head of loss would involve knowledge of the factual cause of the
loss, which is an interpretation that this court has rejected in Morrison v ICL.
23. It is not clear that the interpretation set out in para 21 above is what the
Scottish Law Commission envisaged in its Report on the Reform of the Law
Relating to Prescription and Limitation of Actions (1970) (Scot Law Com No 15),
which led to the 1973 Act and in which it recommended (para 97) that:
“the [prescriptive] period should commence … (c) if the fact
that pecuniary loss or damage to property has been caused by
the delict or quasi-delict is not immediately ascertainable, from
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the date when the fact that the aggrieved party has suffered
pecuniary loss or damage is, or could with reasonable diligence
have been, ascertained by him.”
In its Report on Prescription and Limitation of Actions (Latent Damage and Other
Related Issues) (1989) (Scot Law Com No 122) the Commission at para 2.7
described its policy in the 1970 Report as being that “the starting point for the
running of prescription should be the date when that damage is or could with
reasonable diligence have been discovered by the claimant”. This court’s decision
in Morrison v ICL is consistent with that policy because the physical damage to
property was manifest but it is questionable whether section 11(3) is so consistent
in circumstances where the claimant suffers financial loss rather than observable
damage to his physical property. As I state in para 25 below, the Commission has
revisited the topic since this court decided Morrison v ICL and has made further
recommendations for reform.
(ii) Application to the facts
24. I am not able to accept the submission of Mr Howie QC, who appears for the
trustees, that time did not begin to run against the trustees until they received the
decision of the Scottish Land Court which demonstrated both that the sums which
they had spent on pursuing the application to gain vacant possession of the 40-acre
field and the 50-acre field could not be recovered from the tenant and that they had
lost the opportunity to develop those fields. Before they received that decision, the
trustees may have regarded the tenant’s refusal to remove from those fields on 10
November 2005 as unjustified and may have pursued the application to the Scottish
Land Court to remove him in the belief that it was likely to succeed. They may, as
a result, have believed that the expenditure on legal fees and outlays, which they
incurred in so doing, would ultimately be recovered from the tenant in large measure
when their application succeeded. But any such understanding on their part is
irrelevant. On an objective assessment, the trustees suffered loss on 10 November
2005 when they did not obtain vacant possession of those fields and therefore could
not realise their development value. It does not matter whether the loss resulted from
the tenant’s intransigence, as the trustees may have believed, or from someone else’s
acts or omissions. It was also possible that the defects in the notices to quit would
not have caused loss if the tenant had later waived his right to challenge them or had
otherwise surrendered possession of the fields. But he did neither, and with the
benefit of hindsight the failure to obtain vacant possession on 10 November 2005
can be seen as having caused loss to the trustees. At that moment, as in Dunlop v
McGowans, the prescriptive period began to run under section 11(1), unless it was
postponed by subsection (3). But there was no postponement under the latter
subsection: the trustees were aware on 10 November 2005 that they had not obtained
vacant possession of those fields. That was a detriment. They were in any event
actually or constructively aware by 17 February 2006 that they had incurred expense
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in legal proceedings to obtain such possession. As the trustees did not commence
legal proceedings against the respondents until 17 May 2012, it follows that the
respondents’ obligation to make reparation to them has prescribed.
(iii) The future
25. This conclusion, as Lord Malcolm recognised in the concluding paragraph of
his opinion, may suggest that hard cases may be more common than it was
previously thought. But there are live proposals for law reform. The Scottish Law
Commission has published its Report on Prescription (Scot Law Com No 247) in
July 2017, following its Discussion Paper (No 160) in which it invited views on,
among other things, the discoverability test in section 11(3) of the 1973 Act in the
light of Morrison v ICL decision. In its report the Commission recommends (para
3.21) that in relation to the obligation to pay damages section 11(3) should be
amended so that, before the five-year prescriptive period begins to run, the creditor
must be aware, as a matter of fact, (i) that loss, injury or damage has occurred, (ii)
that the loss, injury or damage was caused by a person’s act or omission, and (iii) of
the identity of that person. Whether the creditor is aware that the act or omission that
caused the loss, injury or damage is actionable in law should be irrelevant. This
formula is included in the draft Bill annexed to the Report in section 5(1), (4) and
(5). As the Commission has observed, it is an approach which is well represented in
both civil law and common law jurisdictions (Discussion Paper No 160, para 4.8).
The First Minister has announced on 5 September 2017 that the Scottish
Government intends to bring forward a Bill to reform the law of prescription as part
of its legislative programme. It will be the task of the Members of the Scottish
Parliament to decide whether they agree with the Scottish Law Commission’s
recommendation for the reform of the discoverability test achieves a fair balance
between the interests of the creditor and the debtor in the obligation to make
reparation.
Conclusion
26. I would dismiss the appeal.