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Time Limits in Commercial Litigation: Prescription of Claims

Andrew J P Wilson

Published byAndrew J P Wilson

14th July 2021

Time Limits in Commercial Litigation: Prescription of Claims

Most legal systems provide for time limits to litigation. These time limits restrict the ability of claimants to raise court proceedings after the passage of a specified period of time. This is to strike a balance between affording a claimant a reasonable amount of time to get their case in order and pursue a claim with the interests of a potential defender to not have a potential claim hanging over them indefinitely.

Scots law provides for such time limits through a process known as “prescription”. The effect of prescription is that, after a specified period of time, an obligation will “prescribe” and shall be treated as having ceased to exist. Importantly, the rules of prescription provide that an action in respect of a prescribed claim cannot be raised in the future – it is effectively time-barred.

The law on prescription is set out through complex legislation, which provides an exhaustive list of the kinds of obligations capable of prescribing. The legislation also sets out the relevant time limits, known as “prescriptive periods”, for different kinds of obligations. These time limits can be five, ten or 20 years, with five years being the most common prescriptive period.

Prescription of loan obligations

The legislation importantly provides that, generally, obligations to repay debts shall be subject to the rules of prescription and will prescribe after a period of five years.

Prescription therefore affects a creditor’s right to pursue an unsecured debt, such as a debt under a personal loan. If an unsecured debt has existed for a period of five years or more and the creditor has failed to raise a court action for recovery of the debt, the obligation to repay the debt shall be extinguished completely.

However, if the debtor had written to the creditor acknowledging the obligation to repay the debt, or had made repayments under the loan contract, the five-year prescriptive period would restart. Equally, the creditor may restart the prescriptive period by raising court proceedings in respect of the debt.

Prescription and personal guarantees

Personal guarantees are written, legal promises by an individual to repay a specific loan which cannot be met by the principal debtor. It is common for individuals to guarantee the obligations of their companies in this way, in order to secure funding for their business operations.

Upon signing the guarantee, the individual becomes personally liable for the loan in the instance of the principal debtor defaulting on repayments. Such individuals should be aware of the effects of prescription on their obligations as guarantors.

The prescriptive period for personal guarantees begins when the guarantor’s obligation to make payment to the creditor becomes enforceable. Typically, the guarantor’s obligations shall become enforceable immediately on the default of the debtor, i.e. when the company fails to make loan repayments. However, this will depend on the terms of the specific guarantee. For example, the terms of the guarantee may provide that the guarantor’s obligations shall become enforceable upon receipt of a demand for payment made by the creditor to the guarantor.

If five years or more pass from the date of the guarantor’s obligations becoming enforceable and the creditor fails to raise court proceedings, the guarantor’s obligation to repay under the guarantee will prescribe and the potential for any future claim against the guarantor in respect of the debt shall be extinguished.

Equally, the prescriptive period will restart if the guarantor acknowledges the obligation in writing or makes repayments.

For any advice in relation to any particular aspects of the above, please contact a member of the Wright, Johnston & Mackenzie Conflict Resolution Group.

 

The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at July 2021. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.