Five years from when?

The Supreme Court judgment in David T Morrison & Co Ltd v ICL Plastics Ltd [2014] UKSC 48 significantly impacts on the commencement of the five-year prescriptive period in Scotland.

The case arose from the explosion at the ICL Plastics factory in Glasgow on 11 May 2004 and concerned a claim for damages by the owners of neighbouring premises. The question before the court was whether the action had been raised within the relevant five-year time limit.

The Prescription and Limitation (Scotland) Act 1973 provides that if sufficient steps (typically the raising of proceedings) are not taken within the relevant time limit, then the right to make a claim is forever extinguished. However s 11(3) of the Act provides that the commencement of a five-year prescriptive period can be delayed until whenever the claimant was, or could with reasonable diligence have been, aware that loss, injury or damage had occurred.

It was previously widely thought that claimants’ awareness had to encompass not only the fact that loss had been suffered but also that the loss had been caused by fault or negligence (albeit it was accepted that the identity of the wrongdoer and the exact amount of the loss did not need to be known). However, by a majority of 3:2, the Supreme Court held that claimants cannot delay the commencement of the prescriptive period based solely on ignorance of wrongdoing.

The prescriptive period had commenced on the day of the explosion and the right to claim damages from ICL had therefore prescribed prior to the action being raised.

The decision means that the only basis on which the commencement of the five-year period can now be delayed under s 11(3) is that the claimant was unaware, and could not reasonably have been aware, that they had suffered a loss, i.e. where the damage is latent. A claimant can no longer delay the running of the clock because he or she did not know that the loss was caused by the fault of a third party.

What losses and when?

The status of losses and how they are viewed may evolve over time. Consider the mortgage provider having a right of action against their solicitors for breach of contract in failing to notify information which would have led them to decline a secured loan. The sums ultimately sought will have begun as one, then a series of defaulted loan payments, which later cumulatively become an irrecoverable debt. However, the loss probably only becomes actionable, thus the mortgage provider likely only becomes aware of it, whenever it realises that the sale will not realise adequate funds – say through a professional valuation, or a shortfall in the sale proceeds achieved after repossession.

The most significant impact of the ICL decision will be where loss is clear but fault is not. If a building has defective foundations, the presence and repair of cracked plaster might not be sufficient to alert the owner to negligence by an architect, engineer or contractor. Arguably, awareness of loss occurs as soon as superficial damage occurs necessitating repair work, but the owner might not be aware of causative fault or negligence until he receives professional advice to that effect, say from a surveyor valuing the property for the purposes of sale some years later. Further litigation is likely to determine the extent to which courts might now be willing to look at losses individually rather than cumulatively for prescription purposes.

Claimants may discover loss and probable negligence simultaneously, for example where a valuation report obtained by a repossessing lender indicates both that the proceeds will be insufficient to cover the debt (knowledge of loss) and that the original surveyor’s valuation was excessive (knowledge of negligence). Claimants may also discover negligence before gaining knowledge of loss, for example where the lender discovers a defective standard security (knowledge of negligence) but the borrower is still meeting its repayments (no loss). In such cases the ICL decision is unlikely to have any impact on prescription.

What additional investigations are needed?

Claimants and their advisers now have the burden of investigating fault and raising any proceedings within five years of knowledge of loss. Even then, time may run out sooner if it can be said that they ought to have been aware of the loss earlier. This could be particularly onerous for parties who routinely suffer commercial losses but might not discover the cause until specific audit exercises are carried out.

Prescription has always turned on the state of knowledge of the claimant, and so defenders continue to face similar investigative challenges, albeit they now only require to consider the date of awareness of loss rather than knowledge of negligence. Careful consideration should be given to losses not yet claimed; indeed claimants may now deliberately omit earlier losses from a claim in an effort to defeat a prescription plea, assuming a cumulative approach is adopted in evaluating awareness of loss.

All parties to current or prospective claims where five-year prescription applies should carry out an urgent review. Special priority should be given to cases where settlement offers or tenders are open for acceptance. If more than five years have passed between awareness of loss and raising of proceedings, parties might be well advised to immediately accept or withdraw such offers.

Going forward

Prescription remains highly sensitive to the facts of each case, and further litigation will be needed to clarify the full impact of the decision. Whether frustrated claimants or compensators might pursue their solicitors for failing to recognise, apply or even anticipate the decision, remains to be seen.

The Supreme Court recognised that its decision was at odds with what was previously considered to be the established position under Scots law, and noted that the Scottish Law Commission made recommendations for reform some 25 years ago. However, any legislative change is unlikely to happen soon, or be retrospective in effect. Practitioners should take care to review live or potential claims files and advise clients accordingly.

Guide to five-year prescription in scotland

There is now a strict application of five-year prescription in Scotland unless the claimant was unaware or could not reasonably have been aware that they had suffered a loss, i.e. in cases where the damage is latent. In order to establish the date of awareness, consider:

• What loss or losses
• are claimed?
• When did the loss(es) first occur?
• Were the losses latent for any period?

When did the claimant(s), or should they reasonably have, become aware of the loss(es)? Is more information needed to fully evaluate the date of awareness on the part of the claimant(s)? How might that information be recovered?

Once you identify the date of awareness, check whether that was more than five years ago and whether proceedings were raised before that point, in order to determine the likelihood of any prescription defence.