Knowledge that “something wrong” not needed for time bar

A case alleging negligent tax advice by an accountancy firm was time barred whether or not the pursuers could, with reasonable diligence, have been aware initially of the negligence, a new Court of Session decision has ruled.

Lord Tyre in the Outer House held that two out of three claims brought by brothers James and William Clark against the former partners of now dissolved St Andrews firm MFPT, chartered accountants, had prescribed, on the basis that the appeal decision in Gordon v Campbell Riddell Breeze Paterson (2016: click here for report) required him to reach that result.

The pursuers' case was that James Clark, a builder, had been proprietor of a block of flats, though title to the extent of one half was held in trust for William Clark. In 2007 William wished to realise some capital, and they sought advice from MFPT's then partner Douglas Parsons as to the potential tax consequences. Mr Parsons advised of a CGT liability of £40,000-50,000, which the pursuers averred was incorrect due to two significant errors, the actual liability (including penalties) being much greater. The pursuers were first alerted to this on 21 May 2009; the action was raised on 13 May 2014.

Damages were claimed under three heads: (1) the unnecessarily incurred CGT liability, plus marketing and transaction costs (as but for the erroneous advice they would not have gone ahead with the sale), other costs including a late payment surcharge due to a further failure by Mr Parsons, and distress due to their severe financial difficulty that ensued; (2) alleged negligence and breach of contract by Mr Parsons in failing to declare certain benefits in kind in James Clark’s personal income tax returns; and (3) a further claim relating to those tax returns arising from a loss of tax relief claimable.

Whether the action was time barred depended on s 11(3) of the Prescription and Limitation (Scotland) Act 1973, which referred to time not running while the claimant “could not with reasonable diligence have been aware” that loss, injury or damage caused by an act, neglect or default had occurred. In David T Morrison & Co Ltd v ICL Plastics Ltd (2014: click here for report), the UK Supreme Court held that “aware” referred only to the fact of the loss, and not also to the causation by negligence, so that time began to run regardless of whether the claimant was aware that the loss had been caused by an actionable wrong.

In Gordon the court applied this in relation to defective notices drafted by solicitors, as meaning that time began to run when legal costs were incurred in relation to the notices, although the ruling confirming the defects was not given until some time later.

In the present case the pursuers argued that each claim had to be considered separately. Regarding the first claim, Gordon did not rule out the need for awareness that something had gone wrong; here there had been no such awareness until the advice of May 2009, and similar arguments applied to the second and third claims.

Lord Tyre however ruled that the effect of Morrison and Gordon was that time began to run when the legal costs were incurred, admittedly to the pursuers' knowledge. “I can detect nothing in the opinion of Lord Reed in Morrison to suggest that the ratio is restricted to cases where awareness that a loss has been sustained implies awareness that something has gone wrong”, he stated. “On the contrary, actionability as a relevant element is expressly rejected.”

Nor did Gordon require such knowledge, and any observations by the judges suggesting the contrary could not be reconciled with Morrison. Time had therefore begun to run in 2008, and the whole of the first claim had prescribed: the further elements of loss all flowed from the same advice and decision to sell.

The third claim alleged overpayments of tax, payments of which the pursuers were aware, therefore fell within the same principle. The second claim was not clearly irrelevant, as it was not clear whether any part of the penalty and surcharge sued for had been paid, and the necessary awareness might not have arisen until the advice of May 2009; however the pursuers would be required to make express averments on the point and the prescription plea would be left standing.

Lord Tyre also expressed the view that the case fell within the general rule excluding claims for distress caused by breach of contract.

Click here to view the opinion.