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
Robert Howie QC
Robert Sutherland
(Instructed by
Drummond Miller LLP)
|
|
Respondent
David Johnston QC
Adam McKinlay
(Instructed by
Brodies LLP)
|
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 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 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 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 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 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.
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, [1970] SLC 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 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, [1989] SLC 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 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, [2017] SLC 247)
in July 2017, following its Discussion Paper (No 160, [2016] SLC 160 (DP) ) 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, [2016] SLC 160 (DP), 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.
