Scottish Court of Session Decisions

Pursuers: Lindsay, Q.C.; Semple Fraser LLP

Defender: Logan, Advocate; Balfour + Manson LLP

13 October 2011

[1] In this action the pursuers sue for payment in respect of services and goods provided to the defender in respect of his purchase, refurbishment and modification of two fishing vessels. A verbal contract was entered into in January 2005. The pursuers had provided similar services to the defender over the previous fifteen years. It is averred that all invoices were rendered on a continuing account basis. In 2006 the defender requested the pursuers to submit final accounts. This was done on 9 February in respect of services, and on 22 February, both of 2006, regarding goods. The present action was not served upon the defender until early March 2011. The defender pleads that any obligation upon him to make payment in respect of the invoices has been extinguished by the operation of prescription, all under reference to section 6 and schedule 2(1) of the Prescription and Limitation (Scotland) Act 1973 (as amended).

[2] The pursuers' pleadings in response are not particularly specific, but Mr Lindsay, Q.C. explained that the pursuers offer to prove that, as a result of a course of dealing over many years, it was a term of the parties' agreement that (a) the defender would receive invoices in respect of services provided and goods delivered; and (b) that in respect of services invoices there would be a 30 day period of grace thereafter (10 days in respect of goods invoices) when no interest would be charged and no court proceedings for enforcement would be raised against the defender. The submission was that this postponement of the enforceability of the sums sought in the invoices delayed the start of the five year negative prescriptive period, thus the present action was commenced before, albeit only very shortly before its expiry. If this submission is wrong, then the claim has prescribed. Both counsel agreed that, for present purposes, I require to assume that the pursuers' averments are true, and assess the submission by reference to the terms of section 6 and schedule 2(1) of the Act.

[3] Schedule 2(1) applies to any obligation to pay money in respect of goods supplied on sale or services rendered in a series of transactions between the same parties (whether under a single contract or under several contracts) and charged on a continuing account. The schedule provides that the "appropriate date" for the commencement of the prescriptive period under section 6 of the Act is the date on which payment for the goods last supplied, or, as the case may be, the services last rendered, "became due". The short submission for the pursuers was that, standing the parties' agreement as outlined above, the start of the prescriptive period had been delayed until the expiry of the periods of grace, which in turn depended upon the dates of the invoices. The concept of a debt becoming "due" was equiparated with enforceability by way of court proceedings. For the defender Mr Logan submitted that any such agreement did not have that effect. Payment was due, at latest, from the date of the invoices. It followed that the claim had prescribed before the action began. Both counsel made reference to the decision in McNicoll v Walter Davidson & Sons Ltd 2000 SLT (Sh.Ct.) 16, and indicated that their researches had not uncovered any other case directly in point. In the event I have gained little assistance from McNicoll, which was decided on the basis that the pursuer had not averred any agreement relevant to the issue.

[4] The purpose of schedule 2(1) is to delay the start of the prescriptive period until the end of a running account. However it is well established that, notwithstanding the terms of section 13 of the Act, parties can agree a condition precedent which postpones the existence of an obligation to pay until a date which is later than would otherwise apply. Reference can be made to Royal Bank of Scotland v Brown 1982 SC 89 (Second Division) and McPhail v Cunninghame District Council 1983 SC 246. In Brown the defender successfully argued before the Lord Ordinary that the prescriptive period began as soon as it was open to the creditor to take action to compel performance, in that case repayment of a bank loan by a guarantor. The Second Division upheld a reclaiming motion, holding that the parties had agreed a condition precedent which postponed the existence of any prestable obligation until a demand for repayment had been made by the bank. The action had been raised within five years of the demand, thus the claim had not prescribed. The Lord Justice Clerk (Lord Ross) approached the matter in this way at page 99 of the report:

"The question then is: When did the obligation become enforceable by the pursuers? Were the words 'on demand' included deliberately to introduce an element of postponement or contingency into the obligation so that a demand was a condition precedent to the obligation coming into operation and prestable, or were the words simply unnecessary having regard to the nature, purpose and effect of the obligation? Was it sufficient simply that the default had in fact taken place? Or was it only when payment was demanded?"

In deciding in favour of the pursuers the Lord Justice Clerk recognised that this might mean that the obligation could remain in existence for many years by virtue of the creditor refraining from making a demand over a protracted period, but that was simply the consequence of the parties' agreement. The purpose of the insertion of the words "on demand" into the relevant clause was to make such a demand "a condition precedent to the legal right in the obligation being enforced by the pursuers." Lord Ross emphasised the concept of enforceability, no doubt because the case before the court was governed by the terms of section 6(3) of the Act, which provides that the "appropriate date" for the start of the prescriptive period is "the date when the obligation became enforceable". Thus it was necessary for the court to determine when the obligation "first came into existence and could be enforced by legal process" (emphasis added). At page 100 his Lordship said:

"If 'enforceable' means capable of being enforced and the deed says that the creditor has to demand what is due before it can be recovered from the debtor, I do not regard the obligation as being enforceable until the way has been cleared to enforce it."

[5] In the present case the test is not enforceability under section 6(3), but rather becoming "due" in terms of Schedule 2(1). Mr Lindsay says that there is no difference. Be that as it may, it is clear that the Brown case was decided as it was on the basis that the parties had agreed a condition precedent which postponed the existence of any obligation until the condition had been purified. Can the same be said in respect of the agreement averred by the present pursuers? Is the effect of that agreement to postpone any obligation to pay until expiry of the period of grace; or was it doing no more than favouring the debtor with a promise that before any enforcement proceedings were raised he would receive an invoice setting out the amount due and an interest free period for payment?

[6] In the case of MacPhail it was the requirement in a construction contract for an architect's certificate which postponed any obligation to pay. That may be seen as a reasonably clear case. Until the issue of the certificate it was not possible for the pursuer to know whether money was due from the defender. The certificate fixed both liability and quantum. In the present case once the last services and goods were supplied, all else being well, it could be said that the pursuers were entitled to payment.

[7] A similar issue arose for decision in Scott Lithgow v The Secretary of State for Defence 1989 SC (HL) 9. In his speech at page 20 Lord Keith of Kinkel observed:

"Everything turns upon the true construction of clause 15(5), in particular whether that leads to the conclusion that the parties intended the submission of a priced claim to be a condition precedent to any obligation to indemnify on the part of the Secretary of State."

Contrary to the opinion of the First Division, the House of Lords held that the terms of the relevant clause could not be construed as containing a condition precedent to a valid claim, in which case the clause could not settle the punctum temporis at which the claim and the corresponding obligation to indemnify came into existence. In Flynn v UNUM Ltd 1996 SLT 1067 (Second Division) the general approach set out in Scott Lithgow was followed, with emphasis placed on the date when the pursuer was entitled to claim payment.

[8] If it is proved that there was an agreement between the parties that an invoice would be rendered with a subsequent period of grace prior to the possibility of court proceedings, did that agreement settle the date when the debt "became due" at the expiry of that period of grace? In Brown the issue was determined by reference to the deemed purpose of the provision. In Scott Lithgow the House of Lords held that the relevant clause was of "an administrative character" rather than a condition precedent to a prestable obligation. While the term "administrative" might not be entirely apposite in the present case, I have concluded that, on the assumption that the averred agreement is proved, it did not have the effect of postponing the date when payment was due. It was not intended to be a condition precedent in the sense discussed in the cases. The debt was due as soon as it was open to the pursuers to render an invoice, namely on the date of the last services or goods as per schedule 2(1), albeit the creditor had promised not to enforce the debt until a period after an invoice was rendered. I do not consider that the alleged agreement had the effect of allowing the creditor to postpone indefinitely the commencement of the prescriptive period by delaying the rendering of an invoice. Such an agreement would require clear wording from which the requisite condition precedent could be discerned. On the contrary the alleged agreement proceeds upon the basis that there is a claim to payment, with the invoice relating to that pre-existing obligation. In my opinion an obligation to pay was not agreed to be dependent upon an invoice, but rather an invoice, with the associated period of grace, was agreed to be a necessary prerequisite to enforcement of an existing obligation. At most the agreement was of a procedural nature, in the sense that the debtor could be assured that he would receive an invoice and a period within which to pay (free of interest) before court proceedings would be contemplated. That was the only purpose of the agreement. On the pursuers' approach, the defender was being asked to pay before the debt was due. That would be an odd outcome.

[9] If, as in Brown, the present issue had required to be determined under reference to the terms of section 6(3) of the Act, the outcome might have been different, but I do not require to express an opinion on that issue. The result is that any obligation upon the defender to make payment to the pursuers has been extinguished by the operation of prescription. I shall uphold the defender's plea-in-law to that effect and grant decree of absolvitor. Once again this case illustrates the potential pitfalls of delaying legal proceedings until such a late stage.