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OUTER HOUSE, COURT OF SESSION
[2006] CSOH 191
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A214/04
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OPINION OF LADY
DORRIAN
in the cause
THE LEGAL SERVICES
CENTRE LIMITED
Pursuers;
against
MILLER SAMUEL LLP
and OTHERS
Defenders:
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Pursuers: Woolman, QC, Davies;
Harper Macleod
Defenders: McNeill, QC,
McBrearty; Brechin Tindal Oatts
15 December
2006
Introduction
[1] The pursuers are a property development company. They are suing a firm of solicitors for
breach of contract and negligence. The
primary issue on the Procedure Roll was whether that claim has been prescribed
by virtue of section 6 of the Prescription and Limitation (Scotland)
Act 1973. There were additional
arguments in relation to the relevancy and specification of the averments of
loss. A further issue was settled by
amendment at the bar.
History of Events
[2] In
or about 1985 the pursuers' tender to develop a site in Glasgow
for the Procurator Fiscal was accepted by the Secretary of State for the
Environment. The site was owned by
Glasgow City Council who were to lease it to the Scottish Development Agency,
who would in turn sub let to the pursuers.
A condition of the sub-lease was that the pursuers would develop the
site and in due course sub-let the major part to the Secretary of State for the
use of the Procurator Fiscal.
[3] The
pursuers instructed the defenders, and in particular the third defender, as
solicitors to advise them in relation to the negotiation and drafting of the
leases with the SDA and the Secretary of State.
The lease to the Secretary of State was to be for a period of 60 years,
with a five yearly rent review clause.
[4] It
was eventually agreed that the rent review should be geared to 100% of prime
Glasgow City Centre office rental values.
The pursuers aver that the review
mechanism was to ignore the age and specification of the building, the length
of the lease and other variables or comparators. It is averred that on or about 25 June the
third defender was instructed to include a rent review clause in these terms.
[5] The
lease was executed on 21 December
1989 and 16 January 1990. The rent review clause was geared to prime
office rental within Glasgow City Centre, that being determined on the basis of
a number of suppositions and disregards and in all other respects on the same
terms as the lease between the pursuers and the Secretary of State. The pursuers aver that these suppositions and
disregards and the "same terms" reference should not have been included, and
say that they altered the meaning of "prime Glasgow City Centre office rental
values" from that given in their instructions.
They aver that their inclusion was in breach of the defenders' duties and
that loss and damage has thereby been sustained.
[6] The
Secretary of State entered into occupation of the subjects and, after a
re-measurement, the rent was set at г465,965.95. At a rent review on or about 18th November 1994 the
rent was fixed at г850,000. The pursuers
aver that this was on the shared understanding that the rent was to be based on
a 100% gearing with no allowance for age, location, size or specification of
the subjects or the duration of the lease.
The defenders were not involved in this negotiation.
[7] In
or about 1999 the relevant rights and obligations of the Secretary of State
were transferred to the Lord Advocate. A
further rent review was due for about 17 November 1999. Intimation was given on behalf of the Lord
Advocate that the rent was to be based upon a hypothetical letting of the
subjects on the assumption that they were in the prime office area in Glasgow,
upon the suppositions and giving effect to the disregards in the lease, and
according to the "same terms" condition. The pursuers raised an action for
rectification, which was compromised on the basis of a Minute of Variation,
under which the revised rent from 17
November 1999 to 16
November 2003 was to be г1,225,000 per annum. From 17
November 2003 to 27 May
2005 it was to be г1,240,000.
Thereafter, subject to certain minimum increases, the rent was to be
fixed according to a formula based on 90% of prime office rental values for
Glasgow City Centre. As to the minimum
increases, the varied lease provided for the yearly rent to increase at each
review date by at least 7.73% above the rent payable immediately before the
review date, or by more if the then full market rental value indicated a higher
figure, that full market value being identified as 90% of the open market
rental rate.
[8] The
pursuers aver that since future rents will not be based upon a 100% gearing
they will lose income, estimated at г3,500,000.
Various issues arise in relation to the specification of this loss and I
will deal with these in due course.
[9] The
action was signetted on 24 April 2004. The defenders aver that any obligation upon
them had been extinguished by quinquennial prescription since there was
concurrence of injuria and damnum at the date of execution of the
lease, namely 16 January 1990. The pursuers aver that they did not suffer
any loss until 17 November 1999,
or in any event until 17 November
2004. They then aver,
relying on section 11(3) of the Act, that they did not know, and could not
reasonably have known, that they would suffer loss until early 2000. They make various contentions in support of
this averment and the defenders accepted that this matter should be remitted to
proof before answer.
Submissions
I Prescription
[10] It was common ground that this is an obligation to which
Section 6 of the Prescription and Limitation (Scotland Act) 1973 applied, that
the appropriate date for commencement of the prescriptive period was the date
when the obligation became enforceable, and, under reference to Dunlop v McGowans 1980 SC (HL) 73, that the obligation became enforceable
when there was a concurrence of injuria with
damnum.
(a) Defenders' Submissions
[11] Junior counsel for the defenders submitted that this was 16 January 1990, the date of
execution of the lease. The duty was to
draft the clause in line with instructions, and breach of that must have
occurred by the date of execution, at which point the pursuers were immediately
party to a lease which was less favourable and less valuable than it ought to
have been. Factors might come to light
thereafter which impact on quantification, but there should be no confusion
between the occurrence of a loss and how it must be quantified. Only the extent of it could be affected by
whether the other party to the lease chooses to take advantage of the clause,
not its existence.
[12] Counsel referred to Beard
v Beveridge, Herd & Sandilands W S 1990 SLT 609 where a rent review clause
inserted in a lease in 1967 was found, in 1987, to be inoperable. The issue was whether the loss arose on
execution, or only when it became clear that the tenants would not agree to a
reviewed rent. The Lord Ordinary observed that the
execution of the lease bound the pursuers to it as drafted. Had
they discovered the defect immediately, they could have raised an action on the
same ground of negligence as was before him, even though the damages sought
might have had to be calculated without the accuracy made possible by
supervening events.
[13] Counsel also referred to Jackson v Clydesdale
Bank Plc 2003 SLT 273, a case which involved an undervalue sale of assets
of a company. The Lord Ordinary drew a
distinction between cases such as the present, and cases where negligent advice
or misrepresentation resulted in the recipient concluding a transaction with a
third party. In those cases the question
is whether loss is suffered by entering into the transaction or whether one
must wait to see whether in future, the transaction itself actually produces a
loss or a profit. The case of Osborne & Hunter Ltd v Hardy Campbell 1999
SLT 156, to which counsel also referred, was such a case. On the other hand, in cases such as Beard there is an immediate loss. In Jackson the court found that as soon as
the contract for sale at undervalue was concluded, the company had suffered
loss. The argument in that case was that
any loss at the time of contract was conditional, potential or uncertain as, in
the circumstances, the transaction might have been reversed or undone. The Lord Ordinary described Beard and other cases as exemplifying
that "where a transaction is concluded (or its conclusion was omitted) in
circumstances involving negligence or injuria
and productive of immediate loss, the possibility of voluntary steps being
taken by a third party to remedy, cancel or mitigate the amount of loss will
not on that account delay the starting point for the running of time for the
purposes of prescription."
[14] By analogy, there was in the present case an immediate loss
arising on execution of the lease. In
saying otherwise the pursuers are relying on the possibility of voluntary steps
being taken by a third party to avoid the loss: such steps might ultimately
mitigate the loss, but did not mean that at the time of execution there was not
an identifiable and quantifiable loss. In
Johnston on Prescription and Limitation
at page 72 it was pointed out that in Beard
"although loss was not certain at the date of execution of the lease, it
was bound to occur unless the tenants decided not to take advantage of the
defective rent review clause". It is
suggested that in such circumstances "it is reasonable to say the loss arose at
the date of execution because, for it to be avoided, an extraneous factor -
loosely a novus actus interveniens -
would have to intervene. It does not seem
reasonable to postpone the start of prescription in order to see whether such a
factor does actually materialise." Counsel
submitted that in that passage the word "certain" was used to mean "absolute"
in the sense of quantification and adopted the reasoning there set out.
[15] Counsel submitted that the pursuers' argument would lead to
absurdity. If the date of realisation
were the appropriate date, it would simply be a matter of chance at which
review date the tenant noticed the defect - on that basis it could have been
2045 before it was noticed, at which point the court would be faced with
prescription running only from that stage.
(b) Pursuers' Submissions
[16] For the proposition that a case should only be dismissed for
irrelevancy if the pursuers' case will necessarily fail, counsel for the
pursuers referred to Jamieson v Jamieson 1952 SC (HL) 44 and Miller v SSEB 1958 SC (HL) 20. He
said that it was going too far to say the loss must have been suffered in
January 1990. The issue was whether the
pursuers' argument must necessarily fail.
He referred to Strathclyde
Regional Council v W A Fairhurst
& Partners 1997 SLT 658 in submitting that the onus was on the
defenders to aver and prove that the obligation had prescribed. As in that case, the pursuers had averred
sufficient to entitle them to a proof before answer.
[17] Counsel submitted that the language of the 1973 Act supported
the pursuers' contention. In section
11(1), by using the past tense in the words "caused" and "occurred", the statute
is requiring one to look at what has actually happened, not into the future. The loss must have occurred, and it only does
so when the rent review clause fails in 1999.
Earlier, one can identify only a potential loss. As soon as one identifies a fault there is
the potential for loss but it is only later, when it actually emerges, that the
loss "occurs" for the purposes of prescription. The defenders are saying that because one can
try to measure a future loss, it has occurred already. They say that if a loss is inevitable or even
likely it is to be treated as having happened.
Such arguments distort the word "occurred". The loss has not occurred on execution, even
if one can put a value on it on a contingency basis.
[18] Counsel submitted that the facts in Dunlop v McGowans 1980 SC (HL) 73 confirmed this. In that case the
loss was said to date from Whitsunday 1970, when the landlord could not obtain
vacant possession, but one could say that once the 40 day period of giving
notice was missed, loss became inevitable because they would not be able to
evict the tenant. Once the 40 day notice
point was passed, there was an inevitable loss.
However, the court held that it was only when they could not recover
vacant possession that the loss actually resulted.
[19] Counsel next referred to Duncan v
Aitken, Malone & MacKay 1989 1 SCLR 1 in which instructions were given
in 1963 to convey an interest in a house from husband to wife. The husband was sequestrated in 1983 with no
conveyance having been done. An action
was raised in 1987. The court held that
there was no loss until the pursuer was effectively deprived of her right in
the property, which did not happen until the right became vested in the trustee
in sequestration.
[20] In Fergus v MacLennan 1991 SLT 321 instructions
were given in 1968 and again in 1972 to convey to the pursuer a one half pro indiviso share in a property
bequeathed to her under her mother's will.
In 1973 the whole property had been conveyed to the father and his new
wife. By 1972 the will had been lost. The pursuer argued that she had suffered no
loss until 1983 when the right to the one half pro indiviso share had been irretrievably lost. Prior to that, steps could have been taken to
assert her right in the form of actions of proving the tenor and of reduction. The court concluded that there was, until
1983, only a potential loss, and allowed a proof before answer. Counsel submitted that the issue of certainty
relates not to whether loss can be corrected but whether it has occurred. In both Duncan
and Fergus the loss is said to occur
when it is irretrievable. In the present
case it only becomes known that it is irretrievable at the time of the 1999
rent review. In Osborne
& Hunter Limited v Hardy Caldwell
1999 SLT 153, a case relating to a loan which turned out to be irrecoverable,
the Lord Ordinary had repelled a plea of time bar on the basis that there was
no loss until the loan was called up. The
defenders reclaimed and a proof before answer was allowed on the defender's
argument that, since the pursuers averred that they should never have been
advised to lend the money in the first place, the loss occurred when the money
was advanced.
[21] The issue is not one which should be decided without proof, and
should not have been so decided in Beard,
where there should have been a proof of the defenders' averments that loss
occurred at the outset of the lease. The
case of Beard has been criticised by
commentators. In Walker on Prescription and Limitation (6th edition p72) it was criticised on the basis that it
could not have been certain at the time of execution that any loss would be
sustained.
[22] Jackson v Clydesdale Bank PLC does not assist
since the real issue was whether the links between the company and the receiver
meant that the transaction could be reversed.
Counsel referred to the paragraph 4.46 in Johnston on Prescription and Limitation:
"The view that
loss is sustained at the date of the transaction may be justifiable on the
facts provided that (1) the loss is material; (2) the loss is certain or only
to be avoided if some extraneous factor intervenes; and (3) the loss is not
speculative, prospective, contingent or deferred. If these conditions are not met, the loss
must arise."
Counsel submitted that the loss in
the present case must necessarily be speculative and prospective until the rent
review clause failed in 1999 and that the loss did not occur until that date. The court should therefore allow a proof
before answer.
(c) Senior Counsel for Defenders
[23] Senior Counsel for the defenders submitted that prescription
exists to bring certainty to commercial and other affairs and to avoid stale
claims with their attendant evidential problems. If the pursuers were correct it would result
in a serious breach of these principles and the absurd result that prescription
might not start running until 2045.
[24] What the pursuers have in the present case is a defective
lease, a defective asset. In an action
raised at the outset it would be clear that what they had obtained was contrary
to instructions and consequently less valuable, the only remaining issue being
one of quantification. It is not
reasonable to assume that another party, who has a specific right, will not
take advantage of it.
[25] In Dunlop there was
no expectation of any change in the asset prior to Whitsunday, at which point
effectively a new asset would be created, one with the right to remove the
tenant. They would have had the same
asset on day 41 and day 39 but not at Whitsunday. Fergus v MacLennan was in a separate category
and was really straining the issue: it was difficult in that case to see that a
loss had not occurred at an earlier date.
(d) Senior Counsel for Pursuers
[26] For the pursuers, senior counsel submitted that only the
clearest cases merited a decision at debate.
It is not clear that the conditions referred to above in paragraph 4.46
of Johnston on Prescription and
Limitations are met and it would be appropriate to send the case to proof
before answer on this issue. On the
defenders' argument, the pursuers would have to have raised an action by
January 1995, four years before the problem was identified.
II Relevancy of averments of loss
[28] He noted that the claim involved calculating the present value
of a lost income stream, which necessarily involved actuarial principles. Issues arise about the appropriate rate of
return and how it is to be applied. The
pursuers have simply plucked a figure out of the air, averring that they
"estimate the present value" of lost rental income in the sum of г3,500,000.
[29] The comparison which the pursuers seek to make is not simply
between 90% and 100% of prime city centre office rates. One needs to consider the minimum increase
provided in the formula agreed at variation, on which it is conceivable that
there will be no loss.
[30] Turning to quantification, the averments were fairly bare. Even if enough is averred to allege the year
on year loss, that would be insufficient as it does not show how that is
converted into a present day figure of г3,500,000. Even if one accepts a present annual loss of
г82,000 (based on differentials in the pleadings) one doesn't simply multiply
by the remaining 43 years of the lease.
(b) Pursuers' Submissions
[31] For the pursuers, counsel referred to Smith v Lindsay & Kirk 1998
SLT, a solicitors' negligence case, for the observation that there was "no one
way of approaching the calculation of damages".
He submitted that the pursuers' position was relatively simple, being
based on the difference between what the rent ought to be, and what it is and
will be. Sufficient notice is given of
what these figures are, so the defenders are not prejudiced by lack of notice
when it comes to proof. Calculation of
the precise sum is straightforward. The
defenders have been able to do their own calculation with sufficient precision
to aver that the pursuers have either suffered no loss, or indeed, are better
off. As for the expenses of the earlier
litigation, it is simple arithmetic to identify the sum sued as г50,000, which
can readily be checked against the account of expenses.
(c) Senior Counsel
[32] Senior Counsel accepted
and slightly amplified the arguments on loss made by their juniors. Reference was also made to Ellon Castle Estates v MacDonald 1975 SLT (n) 68 and Robertson Construction Denny Limited v Bone Steel & Others, an unreported
decision of Lord Clarke of 29 October
2003.
Discussion
Prescription
[33] In my opinion the situation in the present case, as in Beard, is that at the time of execution
the pursuers had something which was intrinsically less valuable than it ought
to have been. It seems quite wrong in
principle that the running of prescription should depend on a third party
failing to enforce a right to which he was entitled. I agree with the observations in Jackson that the "possibility of
voluntary steps being taken by a third party to remedy, cancel or mitigate the
amount of loss will not on that account delay the starting point for the
running of time for the purposes of prescription."
[34] Such an approach is consistent with the cases cited to me. In Dunlop
there was no question of having to rely on the intercession of a third party
for loss to ensue. In that case the
landlord would not have been able to evict the tenant before Whitsunday even if
proper notice had been given. Until that
point, even after the period had started to run without notice having been
given, the landlord had the same asset with the same worth, i.e. a property with a sitting tenant. Only at Whitsunday did he have something
different and less valuable than that which he ought to have had, namely a
property without vacant possession. That,
it seems to me, is the reasoning of the court.
It was not because in the interim
the tenant might agree to leave, or die, or because of any other such
contingency. The reasoning in Dunlop appears to be wholly consistent
with both Beard and Jackson.
[35] Duncan was not a case in
which loss could only be avoided by the intervention of a third party; it was a
case in which loss would not follow until such an action put it out of the
pursuer's hands to prevent it.
[36] Fergus is admittedly
a more difficult case to reconcile. However,
on one view of it, if the loss is treated as being the loss of the property,
that loss only occurred when it was out of the pursuer's hand to obtain title
to the property. That only happened in
1983 when, by operation of law, the loss became inevitable. This may offer some explanation for a case in
which, at first blush, at least some loss must have occurred before 1983. However, until 1983 the purpose of the
instructions could still have been carried out, albeit at additional cost. The factual situation was somewhat
complicated and it was in the "unusual circumstances" the court felt it
appropriate to allow a proof before answer to establish the facts.
[37] Osborne is quite a
different species of case. In such
circumstances a loss would not usually have been incurred until there was
default in the loan, but that is not a good analogy with the circumstances of
the present case. Moreover, it is wholly
clear that the court took the course it did because of the particular
circumstances of the case. Where
pursuers aver that they should never have been advised to lend in the first
place, and, but for the negligent advice, would not have done so, their own
averments immediately raise the possibility of the loss having occurred at the
earlier date.
[38] Strathclyde Regional
Council v Fairhurst is again a
different type of case. That was a case
involving negligent design of a bridge, in which it was recognised that what
had to be established was physical damage of a material kind. One can readily see the need for proof in
such circumstances.
Decision
Prescription
[39] In my opinion the defenders were correct to suggest that the
pursuers are seeking to confuse the occurrence of a loss with its
quantification. At the time of the
execution of the lease they had a less valuable asset than they should have had
and, as in Beard, would have been
able to raise an action. As in Beard, the assessment of damages might
have been less capable of precision than at a later stage but the exercise
could clearly have been carried out. It
is not unusual for the court to have to approach the assessment of damages
according to certain future likelihoods.
Accordingly I am of the view that the claim has prescribed by virtue of
section 6 of the Prescription and Limitation (Scotland)
Act 1973. I will therefore withhold from
probation the averments in article X of condescendence (i) at page 74 of the
Closed Record (as amended), from the words "the pursuers did not suffer" in
line 6 thereof, to the words "Further, and in any event," in line 12 thereof;
and (ii) in the fifth line of page 76, the words "November 1999 et separatim"
Averments of loss
[40] I consider that the pursuers have made sufficient averments
both to show a loss and to enable a quantification of that loss to be
calculated. They aver or admit: the
original rent up to 1999 and what the rent in 1999 and 2004 would have been
under the clause as instructed; the rent as varied from 1999 to 2003; from 2003
to May 2005; and from then to 2009. They
aver the formula to operate from 2009 and aver that, based on historical rental
values, rents are likely to continue to rise at a sum in excess of 7.73%. They aver that the varied rent will never
reach the sum it would have done had
the clause been drafted as intended. They
may be right or they may be wrong about this.
The defenders' approach may eventually be preferred. However it cannot in my view be said that the
averments are not sufficient to allow the pursuers a proof on the matter.
[41] I shall therefore repel the first plea in law for the defenders
and the third plea in law for the pursuers and quoad ultra allow the parties a proof before answer of their
averments.
