Scottish Court of Session Decisions

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2016] CSIH 16

A240/12

Lady Paton

Lord Bracadale

Lord Malcolm

OPINION OF LORD MALCOLM

in the Reclaiming Motion

by

LINDA ANNE GORDON AND OTHERS

Pursuers and Reclaimers;

against

CAMPBELL RIDDELL BREEZE PATERSON LLP

Defenders and Respondents:

Act:  Howie QC, Sutherland;  Drummond Miller LLP

Alt:  Johnston QC, McKinley;  Brodies LLP

8 March 2016

[8]        The pursuers own three fields in the Killearn area.  In 2004 their solicitors (the defenders) advised them to end the agricultural tenancies over the fields.  The defenders were instructed to serve notices to quit to take effect on 10 November 2005.  However, the tenant remained in possession.  In February 2006 applications were lodged with the Scottish Land Court seeking his removal.  On 24 July 2008, following a hearing on evidence, the applications regarding two of the fields were refused because of defects in the notices.  Almost four years later, to be precise on 17 May 2012, the present action was raised in which the pursuers seek damages from the defenders on account of their alleged breach of contract in drafting ineffective notices to quit.  The defenders do not concede the merits of the case, but also plead that, in terms of section 6 of the Prescription and Limitation (Scotland) Act 1973, any obligation to pay damages to the pursuers has prescribed in that it was enforceable for more than five years before the action was raised.  Particular reliance is placed on the fact that the heads of loss include legal fees paid to the defenders well before May 2007 in respect of the Land Court proceedings.  After a preliminary proof on this issue the Lord Ordinary upheld the plea of prescription and absolved the defenders.  The pursuers now reclaim against (appeal) that decision.

[9]        In resisting the plea of prescription the pursuers rely upon the terms of section 11(3) of the 1973 Act.  For the purpose of the identification of the date on which the five year prescriptive period will commence, section 11(1) provides that, subject to the remaining subsections, an obligation “to make reparation for loss, injury or damage caused by an act, neglect or default shall be regarded ... as having become enforceable on the date when the loss, injury or damage occurred.”  Section 11(3) states that where on the date referred to in subsection(1) “the creditor was not aware, and could not with reasonable diligence have been aware, that loss, injury or damage caused as aforesaid had occurred, the said subsection(1) shall have effect as if for the reference therein to that date there were substituted a reference to the date when the creditor first became, or could with reasonable diligence have become, so aware.”

The submissions of parties
[10]      The pursuers submit that not all expenditure amounts to a loss, and that, prima facie, money spent upon services rendered by solicitors will not usually be regarded as “loss, injury or damage” within the meaning of the Act.  Until the judgment of the Land Court the pursuers did not and could not have known that the liability in respect of legal fees amounted to “loss, injury or damage caused as aforesaid”, thus the five year period did not begin until the date of that decision, namely 24 July 2008.  If this is correct the action was raised within the five year prescriptive period.

[11]      Relying upon the decision of the UK Supreme Court in David T Morrison & Co Ltd (t/a Gael Home Interiors)  v ICL Plastics Ltd 2014 SC (UKSC) 222, the submission for the defenders is that section 11(3) only applies in cases of latent damage, that is where the problem is not manifest and the claimants are justifiably unaware of the fact of loss, injury or damage.  The prescriptive period began when the pursuers knew that they were incurring expenditure on legal fees.  This remains so even if, at the time, the pursuers were unaware that (a) the notices were invalid, and (b) that but for a breach of duty the costs would not have been incurred.

The case law and the Lord Ordinary’s decision
[12]      In Morrison the fact of loss was obvious – it involved damage to a building caused by an explosion at a neighbouring property.  Given the devastation, the question of whether the claimants knew that damage had been sustained did not arise.  It was held that the five year prescriptive period began when they knew of the impact on their property.  Here the pursuers say – what if the damage is purely financial in nature, and at the time seems no more than expenditure on services bought and paid for?  If it is not immediately ascertainable that the costs may have been caused by an act or omission which might amount to a legal wrong, does that mean that, in terms of section 11(3), the commencement of the prescriptive period is postponed?  That is the question raised in this appeal.

[13]      If the question was asked before the decision in Morrison, the answer would have been relatively straightforward.  For many years it was generally accepted that the proper approach to section 11(3) was set down in the opinion of Lord Clyde in Greater Glasgow Health Board v Baxter, Clark & Paul 1990 SC 237 (subsequently approved by the First Division in Glasper v Rodger 1996 SLT 44 at 47).  Lord Clyde said (page 251):  section 11(3) looks for “an awareness, not only of the fact of loss having occurred, but also the fact that it is a loss caused by negligence”.  The view was that the logic of the statutory scheme points to a requirement of knowledge that a right of action exists before the obligation is deemed to be enforceable.  It was thought that the contrary approach robs the reasonable diligence test of any context or content.

[14]      A very different interpretation was adopted by the majority of the Justices in Morrison (Lords Neuberger, Reed and Sumption).  It was held that the words “caused as aforesaid” in section 11(3) do not carry with them any requirement beyond knowledge that the loss has occurred.  It is “an adjectival phrase” which describes the preceding words (para 47).  According to Lord Neuberger, if Parliament had intended a creditor to be aware of the cause of the injury before time began to run, that would have been spelled out in clear terms.  An example of this could be found in the limitation provisions in the Act.

[15]      Nonetheless it seems clear that, for Lord Neuberger, it is necessary for there to be awareness of an injury.  Five years “from the date of discovery of loss, injury or damage” is plenty of time to discover all that is needed to raise proceedings (para 55).  This highlights the issue in the present case.  What is meant by “discovery of loss, injury or damage”?  Did the prescriptive period begin when the pursuers knew that they had incurred a liability in fees to solicitors, or was it postponed until they were aware, or should have been aware, of the background facts which demonstrate that the costs may be recoverable from the solicitors?  Can it be said that only then were the pursuers actually or constructively aware of having suffered “loss, injury or damage”?  An affirmative answer to that question is not easy to reconcile with the approach adopted by the majority of the Justices in Morrison;  an approach which appears to rule out any inquiry as to whether the pursuers were ignorant of, or on notice as to the cause of the claimed loss.

[16]      The Lord Ordinary upheld the prescription plea on a narrow and precise basis (paras 21/22).  On the strength of Morrison his Lordship held that it would not be relevant to prove that, until the Land Court decision, the pursuers could not have regarded the legal expenses as a loss.  To do otherwise would introduce a subjective consideration which has no place in terms of section 11(3).  The obligation to pay the bills was not latent damage.  It followed that the prescriptive period began when the pursuers knew that they had incurred a liability in respect of the fees and outlays, “not when they became aware that they had sustained a compensatable loss in the reparation sense.”  There was no finding that at the time of the expenditure the pursuers knew or ought to have known that the notices were invalid and that the tenant had a right to remain.  There was no finding that the pursuers should have realised that something had gone wrong. The Lord Ordinary’s decision rested solely on the pursuers’ knowledge that legal fees were being incurred.

Discussion
[17]      Lord Reed began his judgment with the observation that there was no doubt that at or about the time of the explosion Morrison knew that their property had been damaged.  As a result the focus of the Justices’ discussion was on a different point from that at the centre of the present case.  There was no direct consideration of the situation when knowledge of the cause of an event is said to be relevant to awareness that one has suffered something which can be identified as “loss, injury or damage” within the meaning of the statutory provision.  The emphasis was on the words “caused as aforesaid”.  However the Justices explained, in detail, the correct overall approach to section 11(3).  The view was that it would make sense to postpone the prescriptive period when the creditor is not, and has no reason to be aware that in fact he has suffered damage, categorised as cases of “latent damage”.  (The term “latent damage” fits easily with property damage, but less so in respect of financial claims.)  Is the present case one of latent or patent damage?  The defenders say patent because, from the start, the pursuers knew all about the legal costs, and indeed paid them.  The pursuers say latent, because, at the time, they could not reasonably identify the payments as items of loss, injury or damage.

[18]      At paragraphs 16 and 17 Lord Reed addressed two alternative scenarios, namely:

(1)        Section 11(3) relates only to the awareness or ignorance of loss, injury and damage, or

(2)        the creditor also requires to know the cause of the loss.

Is there a third scenario, or at least a variant of the above, namely where the creditor knows of the facts which amount to the loss, but, for good reason, remains unaware that he has sustained something which can be categorised as harm or damage – and, if so, how does section 11(3) relate to that situation?  In Greater Glasgow Health Board Lord Clyde did not need to address any question of the third scenario since he fused the two issues addressed by Lord Reed as part of what he saw as the logic of the statutory scheme.  For Lord Clyde, whatever the impact upon the creditor may be, the question is, does he know, or should he know, that it can properly be described as loss, injury or damage caused by an act, neglect or default?

[19]      The difficulty is that if this court recognises the third scenario, and in that sense reflects the scheme outlined by Lord Clyde, or that proposed by the minority in Morrison (to be mentioned shortly), where would that leave the reasoning of the majority in Morrison, and how would one go about drawing the boundary between its application and non-application?

[20]      Sections 6 and 11 do not distinguish between different forms of loss, injury or damage, and the Justices would have been fully aware that there cannot be one rule for property damage and another for financial claims.  It is clear that the majority decision was to reject the approach favoured by Lord Clyde in Greater Glasgow Health Board and also the variant of it proposed by the minority of the Justices in Morrison.  To reject the approach of the Lord Ordinary and uphold the present appeal would involve at least a partial return to one or other of them.  As the defenders submit, if it is relevant to have an inquiry into whether the pursuers had no reason to know that they might fail in the Land Court proceedings because of deficiencies in the notices to quit, that reintroduces consideration of the kind of extraneous factors rejected by the majority of their Lordships in Morrison.  According to the defenders, it is enough that the costs can be categorised as a loss caused by any negligence, and that at the time the pursuers knew all about the costs.

[21]      The decision in Morrison teaches that section 11(3) addresses only latent damage.  Given the pursuers’ knowledge of the costs, it is not easy to categorise them as latent damage.  Not without hesitation, my opinion is that a careful review of Lord Reed’s judgment indicates that it is not possible to uphold this appeal and remain consistent with his Lordship’s reasoning.  It began with the classic exposition of Lord Keith of Kinkel in Dunlop v McGowans 1980 SC (HL) 73, that a single and indivisible right of action accrues when injuria concurs with damnum.  For present purposes the injuria is the service of the defective notices and the damnum includes the liability in legal fees, which it is agreed were paid more than five years before the action was commenced.  The pursuers knew about the payments at the time, and therefore were fully aware of the occurrence of the events which constitute damnum, but they contend that they did not know, and had no reason to suspect, that it had been caused by an act, neglect or default.  The bulk of Lord Reed’s judgment is taken up with a rejection of any need for such knowledge, whether actual or constructive, before the prescriptive period will begin to run.  A contrast is drawn with the terms of sections 17, 18 and 22 where the draftsman made it clear “by express language” when the creditor’s ignorance of certain matters would be relevant.  There is no room for Lord Clyde’s requirement for knowledge of a breach of duty.  The emphasis is on knowledge, or lack of knowledge, of the occurrence of loss, injury or damage, which is viewed as a matter of objective fact.  In para 25 his Lordship said:

“Section 11(3) addressed the problem which could otherwise arise where there is latent damage, namely that the creditor is unaware of (the occurrence of loss), by requiring the date of actual or constructive knowledge of its occurrence to be used instead for the purpose of section 11(1).  If section 11(3) is so interpreted, all three subsections share a common focus upon the occurrence and timing of loss.” (emphasis added)

[22]      Lord Reed explained why he rejected Lord Clyde’s interpretation.  Importantly for present purposes, he (and Lords Neuberger and Sumption) also rejected the approach of Lords Hodge and Toulson, which treated “caused as aforesaid” as meaning “caused by an act or omission”, without any actionability implication.  In short, in respect of section 11(3), according to the majority, the test is objective.  Has the creditor suffered an injury?  If so, is he aware of the facts which constitute the injury?  If yes, the prescriptive period has begun. 

[23]      Lord Hodge interpreted section 11(3) as requiring actual or constructive knowledge of both loss and its factual cause through an act or omission (para 87).  He gave three reasons.  Perhaps he might have added a fourth, namely that there may be occasions when knowledge of the cause is necessary for awareness that loss has occurred.  However Lord Reed said that “it would make little sense” to postpone the start of the prescriptive period until the creditor was aware of an act, neglect or default, but not the identity of the wrongdoer (para 33).  In para 15 his Lordship asked – does section 11(3) apply not merely in cases of latent damage, “but in every case where the creditor was not aware, at the time when the loss occurred, that it had been caused by an act, neglect or default?”  The rest of Lord Reed’s judgment explains why this question should be answered in the negative.

Decision

[24]      For the reasons so clearly explained by Lord Sands (and in such memorable terms) in Assessor for Aberdeen v Collie 1932 SC 304 at 311/2, it is not the task of this court to evaluate the competing views expressed in Morrison, but rather to understand and then, if applicable, follow the approach of the majority in the present appeal.  If this or a similar case finds its way to the Supreme Court, the Justices, with their greater insight into their thinking, may reach a different view.  They may opine that the intention was to confine the latent/patent analysis to cases where it would be apparent to anyone who was aware of the circumstances now claimed to be a recoverable head of loss, that they represented an injurious event, or at least something untoward such as would prompt inquiry into the cause.  They may take the view that the circumstances of the present case are not covered by the reasoning and the decision in Morrison.  However, for myself, I agree with the approach of the Lord Ordinary.  On my reading of the judgments, I am of the opinion that an application of the interpretation of section 11(3) adopted by the majority of the Justices in Morrison requires that this reclaiming motion be refused.  It was acknowledged that the benefit of the certainty achieved by the majority’s approach might come with the creation of “hard cases”.  This action suggests that, pending the current review of the law by the Scottish Law Commission, the hard cases may be more common than anticipated.