With the recent Supreme Court decision of Gordon Trustees v Campbell Riddell Breeze Paterson LLP (Scotland) [2017] UKSC 75, we now have the leading judgment on when the clock starts ticking on prescription (limitation) claims for professional negligence where secondary limitation is pleaded.

In Scotland, primary limitation is, five years from the date of advance under Nykredit. Secondary limitation under the relevant section of the Prescription and Limitation (Scotland) Act 1973 (“the Act”) is five years from the date you knew of the loss or could have discovered it using reasonable diligence.

Typically, a lender will only know of a potential loss when they take possession and obtains a valuation less than the debt. Most lenders use the date of repossession valuation as the start of the five year period. However, this decision casts doubt on this approach.

Summary of the case

In 2003, the trustees of three areas of agricultural land (the Trustees) instructed solicitors (the First Solicitors) to serve notices to quit on the tenant, in order that they could recover possession of the land. Two of the notices were in fact defective. The tenant did not comply with the notices, and remained in occupation of the land. In February 2006, due to a conflict of interest, a separate firm of solicitors (the Second Solicitors), acting on the instructions of the Trustees, sent three applications to the Scottish Land Court, seeking removal of the tenant from each of the fields. In July 2008, the applications for two areas of the land were refused on the basis that “there was a fatal flaw in the Notice to Quit.” The Trustees subsequently brought proceedings against the First Solicitors in May 2012 arguing that they were in breach of an implied term of their contract, namely to exercise the degree of knowledge, skill and care expected of a reasonably competent solicitor.

The First Solicitors argued that, even if they were found liable, the Trustees were out of time to bring such a claim in any event (prescription in Scotland).

Pursuant to the terms of the Act, the time limit for a breach of contract is five years, and time starts to run from the date when the “loss, injury or damage occurred”. The Act does allow, as with England & Wales and Northern Irish law, for an extended period of time if the Trustees were not aware, and could not with reasonable diligence have been aware, that the loss, injury or damage caused had occurred. In this scenario, time does not run until the date when the Trustees first became, or could with reasonable diligence have become, so aware.

The question in this case surrounds the interpretation of what the Trustees were required to be aware of.

The decision

The Trustees' awareness of the loss (not the cause of the loss) was sufficient to start the limitation clock running.

It was held the Trustees incurred the loss on 10 November 2005. It was on that date the Trustees were aware they had not obtained vacant possession, due to the defective notices to quit. In any event, the Trustees were, by 17 February 2006, aware that they had incurred the Second Solicitors' fees to obtain possession. As legal proceedings were not commenced until 17 May 2012, some six years later, limitation had already expired.

The court did not agree with the Trustees' contention that they were not aware of the "loss" until the Land Court issued its final determination. It was sufficient they had incurred an expense for the Second Solicitors' legal fees, which they otherwise would not have incurred, in 2005.

The impact

This decision severely restricts a lender's ability to rely on secondary limitation in Scotland. If the Supreme Court's reasoning is applied to lender claims, lenders may well be restricted to the primary limitation period of five years from the date of the advance.

Lenders beware

This decision suggests that as soon as you incur costs, you are incurring a loss and you are, in effect, on notice of a claim. This has obvious implications where a customer is in and out of default with legal processes being started and delayed or stopped on a few occasions.

A strict application of this could mean that your claim is out of time long before you have a property in possession depending on the circumstances. Does this mean that as soon as a customer misses a payment or an account goes into legal that a prudent lender needs to investigate the original professionals involved? That would seem absurd.

There are many counter arguments, but, in the meantime, this decision has given insurers huge confidence and prescription arguments are being run in multiple cases which could have settled pre Gordon's Trustees.

To be on the safe side, lenders should therefore raise and serve proceedings at the earliest opportunity once on notice of loss or any possibility of loss.