At around midday on 11 May 2004 there was a huge explosion at the Stockline Plastics factory in Maryhill, Glasgow. The explosion, which was caused by a corroded pipe carrying liquid petroleum gas, resulted in the immediate collapse of the building and the tragic death of nine people, with another 45 suffering serious injuries. Ten years later, that same explosion sent shockwaves through the Scottish legal community when the Supreme Court gave its judgment in the case of David T Morrison & Co v ICL Plastics, thereby changing the professions' previous understanding of how the five year time limit for bringing a civil liability claim operates.
As the Scottish Government launches its consultation on the draft provisions for implementing the Prescription (Scotland) Act 2018, this article briefly summarises where the law currently stands on the five year time limit for bringing latent damage claims in Scotland and what we can expect from the changes which will be coming into force in the coming years.
The Five Year Cut-Off
In Scotland there are two key 'prescription' periods which restrict a party's right to bring a claim for breach of contract or professional negligence (along with various other types of claim) for historic losses. Principally, there is a five year time limit which runs either from the date a loss was suffered or, if the loss lay undiscovered, from the date the claimant, in Scotland a pursuer, was (or should reasonably have been) aware of the loss. In the background there is a concurrent 20 year “longstop” which runs from the date of loss, irrespective of whether the loss remains hidden.
When David T Morrison & Co brought a claim against ICL Plastics, the owners of the Stockline factory, they did not commence that court action until August 2009, which was more than five years after the explosion occurred. In doing so, they relied on s. 11(3) of the Prescription and Limitation (Scotland) Act 1973 (the "1973 Act") which postpones the start of the five year period in cases of hidden, or 'latent' damage.
For decades, s.11(3) had been widely accepted to mean that the five year time limit did not start to run unless the pursuer could reasonably have known two things: 1) that they had suffered loss, injury or damage; and 2) that the loss, injury or damage had been caused by a breach of duty.
ICL Plastics challenged that interpretation of s.11(3) and, in a landmark ruling which overturned a longstanding series of cases considering the 40 year old Act, the Supreme Court decided that knowledge that there had been a breach of duty was not required. For the time limit to start running it was sufficient that David T Morrison knew that an explosion had occurred which had caused them loss.
That decision caused the potential time bar of many claims which had previously been thought safely within time and has since led to a number of further high profile judgments.
From Farmers' Fields to Noxious Gases: The Application of Objective Hindsight
The application of s.11(3) of the 1973 Act returned to the Supreme Court in July 2017 in the case of Gordon's Trustees v Campbell Riddell Breeze Patterson. The pursuers in that case were suing their former solicitors for allegedly failing to take steps required to recover possession of farmland from the incumbent tenants.
In a judgment which he recognised as 'harsh' on the claimants, Lord Hodge delivered the Supreme Court's unanimous ruling that, not only does the pursuer not need to know that there has been a breach of duty, they do not even need to know that anything has gone wrong. If a person is aware of an expenditure, which later turns out to be a loss, that is sufficient to set the five year time limit in motion, even if there was no way of knowing at the time that something had gone awry.
Then, in March 2019 Lord Doherty issued his decision in Midlothian Council v Bracewell Stirling Architects and others.
Midlothian Council had discovered that its social housing development in Gorebridge on the outskirts of Edinburgh was uninhabitable due to gas emanating from the former mine workings above which it had been built. The houses were built between December 2007 and June 2009 and occupied without incident until September 2013, when some residents fell ill.
Investigations revealed the presence of toxic gases in the houses and Midlothian Council reacted by demolishing the houses and suing its engineers, along with various other parties, for failing to specify a ground gas defence system.
Following the logic of Gordon's Trustees, Lord Doherty ruled that the original cost of building the houses was, as a matter of 'objective fact' when viewed with hindsight, a loss of which the Council had been aware. The money they spent building the houses had turned out to be wasted, it was therefore a loss. The Council knew it had spent that money and the fact they did not know it was wasted at the time was irrelevant. Thus, Midlothian Council's claim became time barred before they even knew anything had gone wrong.
Losses Masquerading as Benefits?
It is fair to say Midlothian Council's case led to harsh results for potential pursuers in some circumstances and its interpretation of Gordon's Trustees was challenged by WPH Developments Ltd in its claim against Young & Gault LLP.
In that case, Sheriff Reid at Glasgow Sheriff Court considered whether WPH's claim against its architect, who had allegedly drawn up plans which encroached on a neighbour's land, was time barred despite the fact the encroachment could not have been known about at the time.
If the Sheriff had followed Midlothian, WPH's claim would have become time barred five years after it incurred expense constructing the offending walls. However, Sheriff Reid considered that this proposition was 'illogical' and would frustrate the purpose of s.11(3) of the Act. He therefore concluded that Midlothian was wrongly decided.
Where Lord Doherty had considered knowledge of loss as a matter of 'objective fact' viewed with the benefit of hindsight, Sheriff Reid held that s.11(3) was only concerned with the pursuer's knowledge of loss at the time: hindsight played no part in determining that, so even though WPH knew they had spent money, they did not know it was a "loss" at the time and the clock could not start ticking.
Sheriff Reid also considered that financial losses can be latent in the sense that they can 'masquerade' as benefits. Thus, an expense which later turns out to be wasted is not known to be a loss for as long as it is concealed or disguised as expenditure which benefitted the claimant.
In reaching his conclusions in WPH, Sheriff Reid discounted significant parts of Lord Hodge's Supreme Court judgment in Gordon's Trustees, which he considered to be 'obiter dicta' and therefore non-binding. By contrast, in Midlothian Council, Lord Doherty quoted the same sections of Gordon's Trustees and issued a decision which followed them.
In Midlothian Council and WPH we now have two diverging first instance decisions dealing with how s.11(3) of the Act applies to expenses which later turn out to be losses. The WPH case is currently being appealed, so we may yet see clarity restored by a court of higher standing.
The Future
As alluded to above, the perceived injustices potentially caused by David T Morrison led to a review of the law by the Scottish Law Commission. One aspect of that review was to reconsider how the five year time limit should apply to cases involving latent damage.
This resulted in the Prescription (Scotland) Act 2018, which received Royal Assent in December 2018 (the "2018 Act").
When it has been brought into force, the 2018 Act will change s. 11(3) of the 1973 Act so the prescriptive clock does not start to run until the pursuer is aware of: 1) the loss, injury or damage having occurred; 2) that the loss, injury or damage was caused by a person's act or omission; and 3) the identity of that person.
The operation of time limits for bringing claims in Scotland is very different to the system in England and Wales and we have previously considered some of the key differences here. However, while at first glance this reformed law bears a marked resemblance to the equivalent provision in England and Wales for negligence claims involving latent damage, there remain important distinctions beyond the obvious different time periods.
Notably, in the English provision, there is a requirement to have knowledge that the damage is sufficiently serious to justify instituting proceedings. There is no equivalent provision in the reformed Scottish law which will utilise the same words 'loss, injury or damage' as already exist in the 1973 Act and which have been at the heart of so much difficulty since David T Morrison.
Also, in England, the time limit does not start to run until the claimant has knowledge of the fact the damage was attributable to the act or omission which is alleged to constitute negligence (though no knowledge of the fact it is actionable in law is required) and the identity of the defendant. This provision explicitly links the start of the English period to knowledge of the actions which form the basis of the claim. By contrast, the 2018 Act simply refers to knowledge of an 'act or omission' by 'a person'. It does not explicitly link that to the claim in the same way the English provision does.
Exactly how the 2018 Act will operate can only be a matter of speculation at this stage. Before getting to that, the Scottish legislature has to grapple with the somewhat difficult question of how to word the commencement regulations which will bring the reforms into force.
A consultation on implementing the 2018 Act has been launched and the draft commencement regulations provide for the 2018 Act to come into force on a day three years from the date of those regulations. It therefore seems we will be continuing to deal with the legal fallout from the Stockline explosion for many years to come.
For more information, please get in touch with your usual contact at Brodies LLP or the Insurance & Risk team who advise businesses on risk management and claims defence.
