There has been an important decision on time bar from the Inner House, the Scottish appeal court, which resolves conflicting lines of authorities on what a claimant needs to be aware of to start the time bar clock running. The appeal court re-affirmed that the prescriptive clock begins to run when expenditure is incurred, even if that expenditure is only recognised as wasted at a later date. In this regard, it re-emphasised the “harsh” interpretation of Scottish time bar law for claimants applied in other recent decisions.
Time bar in Scots law – the legislative position
In Scots law, time bar – known as “prescription”– is governed by the Prescription and Limitation (Scotland) Act 1973 (the “Act”).
The Act sets out two periods in which, unless a claim or relevant acknowledgement has been made, a claim becomes time barred:
short negative prescription which time bars claims after a period of 5 years; and
long negative prescription which time bars claims after a period of 20 years.
The onset of short negative prescription can be delayed in cases where the claimant was not “aware, and could not with reasonable diligence have been aware” of its “loss, injury or damage” (s.11(3) of the Act). Its progress can also be paused where a claimant is “induced to refrain” from making its claim by fraud or error induced by the debtor (s.6(4) of the Act).
Unlike short negative prescription, long negative prescription is not affected by a lack of knowledge or inducement and as such acts as a longstop date.
Time bar in Scots law – recent developments
In 2014 and 2017, the Supreme Court issued two decisions that substantially curtailed the previously understood scope of s.11(3)’s knowledge test:
- Morrison v ICL: This case concerned a factory explosion. There was significant confusion as to its cause and it was only after a public inquiry pointed to failures by ICL group companies that Morrison raised proceedings
The Supreme Court held that the proper interpretation of the s.11(3)’s knowledge test was that the claimant only had to be aware that it had suffered a loss; the onset of the prescriptive clock was not postponed until the claimant identified who it could claim against. As Morrison knew of the fact of the loss more than 5 years before raising the proceedings, the claim was time barred.
- Gordon’s Trustees: This case concerned service of defective notices to quit by a firm of solicitors. The defects in the notices did not become apparent until receipt of a ruling by the Land Court 4 years after service. Proceedings were raised around 8 years after service but within 5 years of the Land Court’s decision.
The Supreme Court held that s.11(3)’s knowledge test did not postpone the onset of the prescriptive clock “until a [claimant]… is aware actually or constructively that he or she has suffered a detriment”. The claimant does not have to know that they have a head of loss. “It is sufficient that a [claimant] is aware that he or she has not obtained something which the [claimant] had sought or that he or she has incurred expenditure.” A failure to obtain vacant possession or incurring expenditure (such as legal fees spent on the notices) that was subsequently realised to be wasted was sufficient to start the prescriptive clock running. As a result, the claim was time barred.
The impact of the decision in Gordon’s Trustees – particularly in relation to construction projects – was made clear in Midlothian. Midlothian Council had engaged the defender to carry out site investigations. In reliance upon those site investigations, building works were instructed without a ground gas defence system. The development eventually had to be demolished in its entirety, allegedly as a result of the defective investigations.
The Lord Doherty held that Midlothian Council was aware that it had incurred expenditure in instructing the building works in reliance upon the investigations and as a matter of objective fact, the expenditure was wasted. As a result, Lord Doherty held that, following Gordon’s Trustees, the prescriptive clock started at this point and as such Midlothian Council’s claim had been raised out of time. As construction projects often take years to complete, Midlothian means parties can have very little time to make their claims.
WPH Developments – background
Turning to the current case, WPH instructed Young & Gault to provide architectural services in respect of a development in Newton Mearns. Young & Gault provided drawings in October 2012, and those drawings were used in the sale of houses in September & October 2013.
WPH’s case is that Young & Gault’s drawings contained errors. These errors resulted in the construction of walls and garden on a neighbouring property. This was raised by various third parties in 2014 and WPH raised proceedings on 21 November 2018 to recover its losses.
WPH Developments – first instance decision
At first instance, the Sheriff declined to follow the decision of Midlothian on the basis that, in his view, the court had wrongly interpreted the Supreme Court’s decisions in Morrison and Gordon’s Trustees. The Sheriff held that hindsight could not be used to determine the claimant’s knowledge for the purposes of s.11(3) of the Act else that provision would be redundant. For the Sheriff, it was “conceptually illogical” that expenditure the claimant did not know was wasted at the time it was incurred could start the prescriptive clock running.
The Sheriff noted that certain parts of the Supreme Court’s decision in Gordon’s Trustees did not support his analysis, however he was of the view that those parts were obiter and as a result did not establish binding legal precedent.
Young & Gault appealed and the Sheriff Appeal Court granted permission for the case to progress straight to the Inner House, the Scottish appeal court.
WPH Developments – the appeal court decision
The Court overturned the Sheriff’s decision. The Court noted that, contrary to the Sheriff’s finding, hindsight played no part in the Supreme Court’s reasoning in Gordon’s Trustees. Rather “the judgment focussed on the knowledge of objective facts which amounted to loss or damage, not on any subjective understanding of loss”. For the Court, the decision in Gordon’s Trustees means that the prescriptive clock begins to run when expenditure is incurred even if that expenditure is only subsequently understood to have been wasted. In this regard, it upheld the reasoning in Midlothian.
The Court also rejected a separate argument that WPH Developments had not incurred loss until it had paid sums as a result of Young & Gault’s alleged breaches, with the effect that the prescriptive clock did not start until 2015. The Court held that “the fact that an accurate calculation of all consequential loss could not be made until later” did not change the facts that WPH Developments was under a legal liability immediately upon construction of the boundary wall to remove it and that the sale of the properties was based on the erroneous plans.
As the appeal court has resolved these conflicting lines of authorities in favour of the Midlothian approach, claimants will continue to bear the full effect of the “harsh” interpretation given to s.11(3) of the Act by the courts.
In recognition of the harsh impact of recent decisions, the Scottish Government enacted the Prescription and Limitation (Scotland) Act 2018 to rebalance the interests of claimants and defenders. However, the Act is not yet in force and the Scottish Government has not yet indicated a timetable for its introduction. The Act’s commencement will be all the more eagerly anticipated by claimants in light of this decision.
Finally, we can expect more claimants to try and argue that they had been “induced to refrain” from making its claim by fraud or error induced by the debtor in terms of s.6(4) of the Act, given the clearly restricted application of s.11(3)’s knowledge test.