No time to lose

"A brief history of (the law on) time” by Alyson Shaw (Journal, March 2020, 26), discussed prescription and latent damage claims affected by s 11(3) of the Prescription and Limitation (Scotland) Act 1973. As she makes clear, the recent case law has shifted the balance decisively against pursuers. They might reasonably ask: “How did it get so late so soon?” Here are some further thoughts.

As interpreted by the Supreme Court, prescription starts to run under s 11(3) once the pursuer is aware as a matter of fact that he or she has sustained loss. In David T Morrison & Co Ltd v ICL Plastics Ltd 2014 SC (UKSC) 222, the case of the explosion at the ICL factory, it was simple to apply that test: the pursuer was aware of loss on the date the explosion occurred. The issue was more difficult in Gordon’s Trustees v Campbell Riddell Breeze Paterson [2017] UKSC 75, a case of economic loss, where the loss arose from the pursuers’ solicitors serving defective notices to quit. Again, however, the Supreme Court held that the question was when, objectively, the pursuers became aware that they had sustained loss.

Awareness of what?

Gordon’s Trustees, in particular, has led the way to some troubling decisions on economic loss in the context of professional negligence. Take the case of Midlothian Council v Blyth & Blyth [2019] CSOH 29. There the council entered into a contract for construction of a housing development which was built on land above former mine workings. Tenants of the houses fell ill owing to gas emanating from the mine workings. On the advice of consulting engineers, the development had been constructed without any gas membrane. It was found to be inherently defective, the construction expenditure was wasted, and the whole development had to be demolished. The council was of course aware that it was incurring expenditure on construction. The judge held that objectively the council was therefore aware of the loss which it subsequently sought to recover.

This decision seems very odd. The point of s 11(3) is, after all, to postpone the commencement of prescription until the pursuer has certain knowledge. On the face of it, it seems strange that knowledge of expenditure which gives no indication whether the construction work is defective should have the effect of triggering the start of the prescriptive period. The decision seeks, however, to apply the principles set out in the judgment of the Supreme Court in Gordon’s Trustees.

We therefore need to examine the terms of that judgment more closely. In Gordon’s Trustees the solicitors were instructed to serve notices to quit to take effect on 10 November 2005. The notices were ineffective, and the tenant did not move out. The pursuers sustained loss through being unable to recover vacant possession of their land, which they had hoped to develop. The loss included the legal expenses they incurred, as well as loss of the development value of the land.

Some elements of the judgment are straightforward. First, it is necessary at the outset to identify the loss: here that was the inability to obtain vacant possession of the land on 10 November 2005 (see para 24). Secondly, that “loss” is different from the heads of loss: s 11(3) is about awareness of “loss, injury or damage”, not the particular heads of loss (see para 21). Thirdly, s 11(1) states the ordinary rule, that an obligation to make reparation becomes enforceable on the date when loss occurred; s 11(3) postpones that date to the date of awareness of the loss. But the subsections are concerned with the same loss (see para 20). Fourthly, on that approach the Supreme Court concluded that loss for purposes of s 11(1) occurred on 10 November 2005. And it concluded that loss for purposes of s 11(3) occurred on the same date, because the pursuer knew of the loss (failure to obtain vacant possession) on that date (see para 24).

Understanding “loss”

If the judgment ended there, matters would be quite straightforward. But it does not. Two parts of the judgment are problematic. The first is that at the end of para 21 the court says this: “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.”

The reference to incurring expenditure has prompted defenders in cases such as Midlothian Council (and others, such as Loretto Housing Association Ltd v Cruden Building & Renewals Ltd [2019] CSOH 78) to rely on such things as initial construction expenditure to identify the starting date for prescription.

It seems at least possible that the court did not intend to refer generally to expenditure of any kind at all. The words quoted may be intended to refer back to what is said in para 19 about expenditure incurred as a result of breach of contract. But the generality with which they are expressed has opened the door for defenders to advance a much broader line of argument.

The second problem is that the examples the court gives in order to explain the law are difficult to follow. Take this passage, from para 22: “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.” The difficulty with these examples is that the court explained in para 21 that the critical question is when a pursuer becomes aware of loss, not particular heads of loss. But these examples are concerned precisely with heads of loss: where a lawyer has given negligent legal advice, expenditure on legal fees may well be a head of loss, but it is not the loss itself. Where a surveyor has given negligent advice in relation to a house purchase, the price paid for the house may be a head of loss, but the loss itself is the purchase of the house at an excessive value.

The difference between these two approaches is even clearer if we return to the Midlothian Council case. Here the judge held that the council was aware of the expenditure it had incurred between 2007 and 2009. That was wasted expenditure. The council knew about it, so it knew about the loss. The decision reads across the two problematic passages from Gordon’s Trustees mentioned above and it reasons from them to the conclusion that, at the time it incurred the expenditure, the council knew about the loss (see para 22). But, given the tensions identified above in the reasoning in Gordon’s Trustees, this conclusion does not appear to be necessary. The essential point is to recall the distinction between “loss” and heads of loss in Gordon’s Trustees. What are the heads of loss here? They are such things as expenses on professional fees; decanting tenants; demolition; and rebuilding. Depending on how the claim is formulated, they might include the cost of initial construction. But none of these is the same thing as the “loss”. If one asks what the “loss” is here, it is the fact that housing constructed on this particular land without a gas membrane was inherently defective. When did the council know of that “loss”? Only in 2013 (see paras 19-20), less than five years before it raised proceedings.

It is obvious that the fact that the council knew it had paid for construction work does not mean that it knew that it had a claim arising out of the construction work. Why should the exercise of statutory interpretation of the 1973 Act take an entirely different and counter-factual approach? To focus on a head of loss such as construction expenditure appears to make little sense, since it is hard to understand why knowledge of something which gives no indication whether construction work is defective should trigger the start of the prescriptive period. On the approach suggested here, however, the difficulties are removed by focusing on “loss”, as s 11(3) requires, and not being distracted by particular heads of loss, such as expenditure.

Delayed remedy

The Prescription (Scotland) Act 2018 seeks to address the sorts of problems these cases raise, but it is not going to do that quickly. The Scottish Government is expected soon to consult on transitional and commencement provisions. Any change in the law is likely to be several years away. By way of comparison, the 1973 Act came into force in July 1976, three years after the Act received Royal Assent. A lot of cases yet will be decided on the basis of the current wording of s 11(3) as interpreted by the courts. The arguments above, if right, may mean that the picture is not quite as bleak for pursuers as it first appears. But any delay involves risk: pursuers have no time to lose.

Some late news

Since the preceding text was written, another decision on s 11(3) has been issued: WPH Developments Ltd v Young & Gault LLP (in liquidation) (CA30/19), Sheriff Reid, Glasgow Sheriff Court, 8 April 2020. Plans drawn up by the defender architects had wrongly shown the boundary of a development site; relying on the plans, the pursuer property developer constructed boundary walls on land which it did not own. Did prescription run from the date the pursuer incurred the expenditure on building the walls?

The sheriff’s decision contains a close analysis of Gordon’s Trustees and Midlothian Council, to which it is not possible to do full justice here. It must suffice to highlight four points. First, s 11(3) is concerned with a pursuer’s actual or constructive awareness: to determine that, it is not appropriate to make use of hindsight, which is a different thing. Secondly, awareness that expenditure has been incurred is not necessarily the same as awareness of the occurrence of loss. Thirdly, the approach that equates these, which derives from Gordon’s Trustees, is based on obiter dicta rather than on the true ratio of that case (an argument similar to the one set out above). Consequently, Midlothian Council was wrongly decided.