Scottish Court of Session Decisions

[1] In this action the pursuer sues the defenders, who are a firm who carry on business as financial advisers and the partners of the firm, for damages in respect of alleged professional negligence. The defenders' first plea-in-law is a plea that the pursuer's right of action has prescribed. When the case called before me on the procedure roll, counsel for the defenders, Mr Clive, moved me to sustain that plea and dismiss the action. Mr Kinroy, who appeared for the pursuer, moved me to allow a proof before answer.

[2] It is unnecessary to set out the pursuer's averments on the merits of her claim in more than outline. She avers that she and her husband were clients of the defenders between 1987 and 1995. It was principally the second defender, Mr Dempsey, who advised them. In early 1992 he suggested to them that they might invest in a nursing home business. The investment was to take the form of a loan to a Mrs Evans who was a partner in a firm which carried on the business of a residential home, Laverock House. The second defender recommended the investment and made certain representations about it. Because of the recommendation and representations the pursuer and her husband made the investment.

[3] The pursuer lent £10,000 to Mrs Evans, who granted a personal bond dated 4 February 1992 (No. 6/1 of process) in terms of which she undertook to repay the loan on 4 February 1994, or earlier in certain specified events, and to pay certain interest while the loan was outstanding.

[4] On 15 November 1993 Mrs Evans' estates were sequestrated. In due course a final dividend of 5.84 pence in the pound was paid to her creditors. The dividend which the pursuer received is said to have been £603.05. The pursuer avers that she suffered a loss of £9,721.94, which is the sum sued for.

[5] The pursuer avers that her loss was caused by breach of contract et separatim negligence on the part of the defenders. She avers that it was the duty of the second defender in advising her to take into account (i) the financial circumstances of her and her husband, which are said (with some further specification) to have been modest, (ii) the fact that Mrs Evans had to the second defender's knowledge been refused lending by banks and building societies, and (iii) the fact that the loan was an unsecured one to Mrs Evans as an individual. In those circumstances, she avers, it was the second defender's duty to refrain from recommending the investment, and indeed to advise against it.

[6] The issue of prescription raised in the defenders' first plea-in-law turns upon the proper application of the provisions of sections 6 and 11 of the Prescription and Limitation (Scotland) Act 1973. Section 6(1) provides as follows:

By virtue of section 6(2) and Schedule 1, paragraph 1 (d) and (g), the obligation which the pursuer seeks to enforce in this action is one to which the section applies. By virtue of section 6(3) the reference in subsection (1) to the appropriate date is, in this case, a reference to the date when the obligation became enforceable. In this case no question of a relevant acknowledgement is raised. The only relevant claim relied upon is the one made by the raising of this action. It is therefore common ground that any obligation on the part of the defenders to make reparation to the pursuer on the ground set forth in the action has been extinguished if the obligation became enforceable more than five years before the date on which the action was raised, i.e. before 13 November 1993.

[7] The date on which the obligation became enforceable depends on the proper application of section 11. Section 11(1) provides as follows:

Section 11(3) provides as follows:

[8] The defenders' averments in support of their plea of prescription are simple. The action was not raised until 13 November 1998. The defenders aver that the pursuer's right of action became enforceable when the loan was made in February 1992. In any event, they maintain it became enforceable before 13 November 1993. Various averments are made of circumstances from which the defenders maintain that the inference should be drawn that the pursuer was or could with reasonable diligence have been aware before 13 November 1993 that she had a right of action against the defenders. At this stage, however, what matters is whether it can be said on the basis of the pursuer's own averments that the obligation on which she seeks to rely has prescribed.

[9] It is admitted by the pursuer that the date of service of the summons was 13 November 1998. Her averments in response to the assertion that her right of action had prescribed before that date are as follows:

[10] The letters to which reference is made in the passage which I have quoted from the pursuer's pleadings are produced and incorporated in her pleadings brevitatis causa. The letter of 1 June 1993 from the first defenders to the pursuers is No. 6/3 of process. A copy of the letter said to have been enclosed with that letter, and which the pursuer avers that she believes that she signed, is No. 6/5 of process. A signed copy of that letter, dated 3 June 1993, became available shortly before the hearing on the procedure roll, and Mr Kinroy therefore accepted that the pursuer had indeed signed it, as she believed that she had. The letter from the first defenders to the pursuer dated 13 October 1993 is No. 6/4 of process.

[11] The letter of 1 June 1993 is of some length, and it is not in my view necessary to quote it in full. It began by drawing attention to the fact that Mrs Evans had intimated that she would be unable to pay the April 1993 instalment of interest and would be unlikely to meet her obligations in subsequent months. It then set out a recapitulation of the purpose for which the loan had been made, namely to finance an extension of the nursing home, on the basis that the loan would be repaid at the due date out of increased turnover resulting from the use of the additional accommodation. It then narrated that, the first phase of the extension having been successfully completed, Mrs Evans had cancelled the second phase, without stating any reason for doing so, thus losing potential turnover of "up to £70000". The letter then continued:

The first defenders then explained that their expressions of concern to Mrs Evans had resulted in their being replaced as the firm's agents, and that there had also been a break down of the relationship between Mrs Evans and her partner in the nursing home partnership. Mrs Evans' new agent had said that every effort would be made to refinance the business to repay the investors. The letter continued:

The first defenders then stated that they had taken legal advice and felt that a seven day demand letter should be issued by their solicitors in respect of the unpaid interest. They continued:

[12] The enclosed letter, which the pursuer signed, was addressed to MacRae Flett and Rennie. It narrated the loan, the default in respect of interest and the uncertainty about whether "interest responsibilities will be met in the future". It therefore proceeded to instruct the solicitors to issue a seven day demand for payment of the interest due. It concluded:

[13] The letter of 13 October narrated that Mrs Evans had been "forced, by legal process" to pay a large part of the arrears of interest, and enclosed a cheque for £433.32 representing interest up to 30 July 1993. It further stated that interest to October 1993 was being pursued.

[14] Mr Clive submitted that in accordance with sections 6(1) and 11(1) the prescriptive period began to run when there was concurrence of damnum with injuria (Dunlop v McGowans 1980 SC (HL) 73). While every case depended on its own circumstances, where a bad investment was made in reliance upon negligent advice, there was generally concurrence of damnum with injuria when the investment was made (Osborne & Hunter Limited v Hardie Caldwell 1999 SLT 153). That applied in the present case, so that the only live issue was whether the pursuer had relevantly invoked the provisions of section 11(3). The essence of what the pursuer offered to prove was (i) that she believed until March 1995 that the loan would be repaid, (ii) that she was naïve and unsophisticated in matters of finance and (iii) that she did not know the effect of sequestration. Her belief that the loan would be repaid was beside the point. As she conceded, loss occurred as soon as the investment was made. If she had sued immediately thereafter, the likelihood of obtaining repayment of the loan would have required to be assessed merely as a matter of quantification of her loss. Likelihood of repayment thus went to quantum of loss, not to whether loss had occurred. It was apparent on the face of the pursuer's own averments that she was aware before 13 November 1993 that the investment had been a bad one and that she had suffered loss by making it. That had become known to her when Mrs Evans defaulted in her payment of interest in April 1993. It became clearer still when the pursuer received the letter of I June 1993. That drew to her attention that Mrs Evans' business was in difficulty because the second phase of the extension of the nursing home had been cancelled, so that the expected increased turnover, from which the loan was to have been repaid, would not be available. That letter also drew to her attention (if, as she maintains, she did not know earlier) that banks and building societies had declined to lend to Mrs Evans. She thus by then was aware of each of the three elements on which her allegation of negligence against the defenders depended (i.e. (i) her own modest financial circumstances, (ii) the fact that the loan was an unsecured one to Mrs Evans as an individual, and (iii) the fact that lending institutions had not been prepared to lend). By the letter of 3 June she instructed that steps be taken with a view to sequestrating Mrs Evans. The only thing she did not at that stage know was whether the loan would ultimately be repaid. The bald averment that she did not understand that there was a risk that her loan would not be repaid was not sufficient for the purpose of a case under section 11(3). That was not a key matter. She knew all the facts necessary to enable her to commence proceedings. If there had, at that stage, been anything that she did not understand, that could have been clarified by consulting solicitors. To do so would have been to exercise reasonable diligence. The present case was distinguishable from Osborne & Hunter Limited v Hardie Caldwell (at 156, col. 2) in that there, prior to the guarantee being called up, there had been no indication to the guarantor of default in respect of the borrower's obligations, whereas here the problems in relation to Mrs Evans' performance of her obligations had been drawn to the attention of the pursuer and she had gone so far as to instruct steps leading to Mrs Evans' sequestration. Given the facts of which the pursuer was aware by June 1993, it was for her to make averments explaining why, in light of those facts, she could not with reasonable diligence have become aware that she had suffered loss and damage caused by the defenders' act, neglect or default (Glasper v Rodger 1996 SLT 44 at 47J; Beveridge & Kellas WS v Abercromby 1997 SC 8

[15] Mr Kinroy for the pursuer structured his submissions in nine points, not all of which were controversial.

1. It was accepted that it was for the pursuer to aver facts and circumstances which brought her claim within the scope of section 11(3) (Glasper at 46L).
2. Section 11(3) requires the pursuer to aver that the summons was served within five years after she acquired actual knowledge or (if earlier) constructive knowledge of the fact specified in the subsection. In this case the pursuer says that the earliest date of constructive knowledge was March 1995.
3. The lack of awareness which requires to be established is lack of awareness that loss has been suffered which was caused by act, neglect or default which gave rise to an obligation to make reparation for it.
4. What a pursuer requires to aver in support of the contention that he was not aware and could not with reasonable diligence have been aware of the relevant facts varies from case to case (Glasper at 47J-48I).
5. A party who is aware that he has suffered loss and damage may reasonably be expected to take some steps to find out what has caused it. Failure to do that calls for explanation if the test of reasonable diligence is to be satisfied. But lack of awareness that loss or damage has been suffered at all gives rise to a different question (Glasper at 47J-K).
6. The exercise of reasonable diligence means being ordinarily prudent having regard to all the circumstances (Glasper at 48E; Peco Arts Inc v Hazlitt Gallery Limited [1983] 1 WLR 1315. It is test of prudence, not of perspicacity, intelligence or understanding.
7. In the application of the reasonable diligence test, "all the circumstances" include the relationship between the parties (Osborne & Hunter Limited v Hardie Caldwell at 156F-J).
8. In such application, "all the circumstances" include the pursuer's knowledge, actual but not constructive. The question was thus what the pursuer ought to have done bringing ordinary prudence to bear in the circumstances of which she was actually aware (Glasper at 48E-G; Sinclair v Macdougall Estates Limited 1994 SLT 76 at 83C-D; Beveridge & Kellas at 91A, 91G, 92C and 93F).
9. The test of relevancy to be applied to the pursuer's averments seeking to invoke section 11(3) was correctly identified in argument in Beveridge & Kellas at 91C-D, i.e. "to accept [her] averments pro veritate and only to hold the case irrelevant if it could be said that, on the assumption that all of these facts were proved, [she] would be bound to fail".

[16] Mr Kinroy accepted that the pursuer's case proceeded on the basis that her loss occurred when she advanced the loan to Mrs Evans. But the question was when the pursuer became aware that, in making the loan, she had suffered loss, or could with reasonable diligence have been so aware. The mere fact that Mrs Evans defaulted on her obligation to pay interest in April 1993 did not per se bring home to the pursuer that in making the loan she had suffered loss, because there might equally have been such default in respect of interest payments in respect of a secured loan. The pursuer made general averments that she was financially naïve and unsophisticated, and that she put trust in the second defender and relied on him to protect her interests. She made more specific averments that she did not understand from the letter of 1 June that there was any risk of her loan not being repaid, that she thought the letter of 3 June was a procedure to obtain repayment, and that she did not know the effect of sequestration. It could not be said that, if she established those averments at proof, she could not succeed with the proposition that she had been unaware until after 13 November 1993 that she had suffered loss. If she was unaware of having suffered loss, there was nothing, particularly given her continuing trust in the second defender, to show that ordinary prudence would have led her to a realisation that she had a right of action against the defenders. A proof before answer should therefore be allowed, leaving the issue of prescription to be resolved along with the merits, the two aspects of the case being closely bound up together.

[17] There is no dispute in this case that, if the issue of prescription were to be determined by reference solely to sections 6 and 11(1) of the 1973 Act, the pursuer would fail. The defenders' first plea-in-law therefore falls to be sustained unless the pursuer has made relevant averments invoking the application of section 11(3). She seeks to do so by averring that she was not aware that she had suffered loss caused by the defenders' act, neglect or default until March 1995. She does, however, acknowledge having received certain information between April and October 1993 which, according to the defenders' submissions, undermines her attempt to assert that she remained lacking in the necessary knowledge until March 1995. The defenders' argument turns largely on the terms of the letter of 1 June 1993. It contained passages which, it is said, made it clear that the making of the loan to Mrs Evans had occasioned the pursuer loss. I do not consider that the mere fact that Mrs Evans had defaulted on payments of interest was sufficient for that purpose, because, as Mr Kinroy pointed out, a debtor in a secured loan might equally default on an interest payment. Such default was not an indicator that the investment was one that should never have been made, and that the mere fact that it had been made involved the lender in loss. It seems to me, however, that two aspects of the letter would have brought home to anyone of ordinary understanding of financial matters that the loan was liable not to be repaid in full. The first such factor was the explanation that the second phase of the extension had been cancelled, and that accordingly the increased turnover, which was to have been the source of the funds used to repay the loan at the due date, had been foregone. The second factor was the advice that steps should be taken to sequestrate Mrs Evans. Looked at objectively, therefore, I am of opinion that the letter of 1 June is capable of being regarded as conveying to the pursuer information from which she might have been expected to infer that things had gone seriously wrong with the investment and that she had therefore suffered loss in making it.

[18] It is at that point in the process of reasoning that the pursuer relies on (a) her own lack of financial understanding, (b) her continuing trust in and reliance upon the second defender, and (c) her lack of appreciation of the significance of what was said in the letter of 1 June and her lack of understanding of what sequestration implied. There are, in my view, aspects of the correspondence relied on in the pleadings that could support the pursuer's position. In particular, the repeated emphasis in the letter of 1 June, and in the letter of 3 June which the defenders drafted for the pursuer, on taking steps to protect her interests (which I have highlighted in the quotations in paragraphs [11] and [12] above) may well have gone some way towards allaying any concern that the letter might otherwise have raised in her mind. Likewise, the letter of 13 October might conceivably have reassured her that the steps being taken to protect her interests were achieving some success.

[19] It seems to me that the difference between the parties lies in their approach to proof of the knowledge of loss necessary to provoke the exercise of reasonable diligence. The defenders, in effect, say that the letter of 1 June contained information that objectively disclosed that there had been loss, and that the hypothetical prudent person, armed with that information, would, with the use of reasonable diligence, have become aware that a right of action against the defenders was available. The pursuer, on the other hand, says that, because of her lack of general financial understanding, her trust in and reliance upon the second defender, and her failure in particular to appreciate the significance of what was said in the letter of 1 June and of the proposal to sequestrate Mrs Evans, she did not reach a sufficient level of understanding before 13 November 1993 to appreciate that she had suffered loss and that it would be prudent to investigate the questions of whether that loss had been caused by act, neglect or default on the part of the defenders. I am satisfied that it would not be appropriate to reach a conclusion on whether the pursuer has relevantly invoked the application of section 11(3) without hearing evidence on the matters focused in those competing positions. I cannot at this stage affirm that, if the pursuer proves all that she avers, she is nevertheless bound to find in her attempt to rely on section 11(3). It is therefore inappropriate that I should say any more at this stage, on a theoretical basis, about the merits of the parties' respective submissions.

[20] I shall accordingly allow to parties a proof before answer of their respective averments. There was no submission before me to the effect that, if I considered that the averments bearing on prescription should be admitted to proof before answer, there should be a preliminary proof on that issue. I agree that in the circumstances of this case such a preliminary proof would not be appropriate. The proof before answer will therefore address all the outstanding issues in the case.