While only affecting contracts under Scottish law in the jurisdiction of the Scottish courts, a recent Supreme Court (formerly the House of Lords) case has turned on its head the position on the limitation period (prescription period under Scottish law) that has been in place for some 40 years.
On 30 July, the Supreme Court handed down its decision in the case of David T Morrison & Co Limited v ICL Plastics Limited & Ors and in doing so changed the generally-accepted understanding of section 11(3) of the Prescription and Limitation (Scotland) Act 1973 ("the 1973 Act") in relation to the commencement of the five-year prescriptive period in Scotland.
The court held that the prescriptive period starts when the claimant suffers loss or damage. The claimant does not have to have actual or constructive knowledge of the act or omission that has caused the loss or damage.
Under section 6 of the 1973 Act, an obligation to make reparation is extinguished through the operation of prescription if a claim is not made (raised) within five years. If a claim is not made on time the right to make that claim is lost entirely. The courts may, of their own volition, strike out any attempt to raise such a claim outside of the prescriptive period.
This is different to the position in England and Wales, where the Limitation Act 1980 acts as a bar to the remedy, not the right to bring a claim. A claim can be made after the relevant limitation period has expired but a defendant will have a cast-iron defence if he can successfully plead limitation.
In May 2004 an explosion at ICL's factory caused extensive damage to a number of neighbouring properties, including that of the pursuer, Morrison. In August 2009, Morrison brought an action against ICL for negligence, nuisance and breach of statutory duty. ICL admitted liability, but argued that any obligation to pay damages to Morrison had prescribed before the proceedings were raised. Morrison had suffered its loss in May 2004 but the claim was not raised until more than five years later.
Section 11(3) of the Act postpones the start of the prescriptive period where "the creditor was not aware, and could not with reasonable diligence have been aware, that loss, injury or damage caused as aforesaid had occurred" until a later date. Morrison, the pursuer, argued that pursuant to section 11(3) the prescriptive period did not begin to run until long after the explosion occurred, because it was not aware, and could not with reasonable diligence have been aware, that the damage had been caused by negligence, nuisance or breach of statutory duty on the part of ICL until a much later date.
Due to the nature of the explosion, Morrison was not allowed access to its premises until June 2004 and was unable to obtain an expert's report until after mid-August 2004. Their argument was that the prescriptive period should not begin to run until its reasonable enquiries into the cause of the accident had been carried out.
The Earlier Decisions
At first instance, ICL succeeded in their defence on the basis that the principle of res ipsa loquitur applied in the circumstances of the explosion - put simply, Morrison must have known the explosion was caused by a breach of duty from day one. Morrison successfully appealed to the Inner House (equivalent to the Court of Appeal) and ICL was then given permission to appeal to the Supreme Court on the correct interpretation of section 11(3) of the 1973 Act.
The Supreme Court Decision
In a majority decision (3:2) the Supreme Court held that section 11(3) acted to delay the start of the prescription period until such time as a claimant knew, or ought with reasonable due diligence to have known, that it had suffered loss or damage. Section 11(3) of the Act could not be relied on to delay the start of the prescription period until the cause of the loss or damage in question was known. Morrison knew it had suffered a loss on 11 May 2004 and by the time it raised its claim on 13 August 2009 its right to bring the claim against ICL had prescribed.
The court held this was the more natural reading of the section as a matter of ordinary English and furthermore if the drafters of the statute had wanted the 'pursuer' to know the cause of the loss before the prescription period started, such was the importance of the principle that it would have required clearer drafting.
The decision was only a majority one and there were two dissenting Judges; Lord Hodge and Lord Toulson. Lord Hodge set out his view that a pursuer must have actual or constructive knowledge (i) that he has suffered more than a minimal loss and (ii) of the acts or omissions which caused that loss. This was the approach that had been taken by the Scottish courts for over 30 years.
Lord Hodge urged the Scottish Law Commission to give fresh consideration to its 1989 report on prescription and limitation, to clarify the position and ensure there is no uncertainty in the future. Until such clarification is provided this judgment must be followed and a claimant must ensure any claim in Scotland is brought within five years of becoming aware - or when it could, with reasonable diligence, have become aware - that it has suffered loss or damage. Any delay in establishing the cause of the loss or damage will not delay the start of the prescriptive period.
It is fundamentally important to note that any clause in a construction contract (or indeed any other contract) which sets out a contractual period within which a claim must be made can only work to reduce the prescription period. Under Scottish law it is not possible to extend the prescription period by agreement - the five year period is absolute.
In England and Wales it may be possible to postpone commencement of the limitation period or exclude the operation of the Limitation Act 1980 - if very clear and express words to that effect are used. It will also possible to suspend the limitation period by virtue of a standstill agreement entered into by the parties. Neither of those options is available in Scotland.
If a contract is governed by Scottish Law this case clearly highlights the importance of ensuring proceedings are raised within five years of a claimant knowing he has suffered a loss. Enquiries as to the cause of the loss and who might be to blame should not be delayed as the clock will already be ticking.
In the light of this decision, you should be checking the position under any contracts and appointments entered into under Scottish law to ensure that there are no circumstances which have given rise to loss or damage which need to be acted upon without delay.