The Court of Session decision in Colquhoun & Ors v Clinical Research Solutions GmbH & Cromsource SRL has provided useful guidance on what may constitute a “relevant acknowledgement” of a claim so as to prevent that claim from being extinguished by time-bar.
In May 2012, the parties entered into a Share Purchase Agreement (“SPA”) whereby the first defender, Clinical Research Solutions (“CRS”), would purchase all the pursuer’s shares in Pleiad Devices Ltd (“the Company”). The second defender is the parent company of CRS and acted as guarantor of its obligations.
The consideration was split between (1) an initial cash payment and (2) an Earn Out Consideration (”EOC”) based on a percentage of certain monies earned by the Company in the three years beginning 1 April 2012. The EOC was to be paid within 1 or 12 months of the end of each relevant year. The latest due date was 31 March 2016.
Parties were unable to agree the sums due for years 2 and 3. In 2015, as allowed by the SPA, the pursuers engaged KPMG to audit the defenders’ records. Various correspondence was exchanged throughout 2015. In December 2015 the pursuers raised a court action to recover documents from the defenders to allow KPMG to conduct the audit. The action was resolved by joint minute.
KPMG conducted an audit which concluded in January 2018 and provided its report on the value of the EOC. The parties remained in dispute on the EOC. In early 2019, in accordance with the SPA, the pursuer referred the dispute to an independent expert for determination. Both parties participated in the process.
In August 2021 the expert issued a determination. CRS refused to pay the sums determined. In October 2021, Colquhoun raised a court action for payment. The defenders claimed their obligation to make payment had prescribed (time-barred) prior to the action being raised.
There were three issues before the court:
(1) Whether the expert determination created a separate, binding obligation and delayed the running of prescription.
(2) Whether the defenders had made relevant acknowledgements in accordance with section 10 of the Prescription & Limitation (Scotland) Act 1973 (“the Act”); and
(3) Whether the second defender was still obliged to pay if the first defender’s obligation prescribed.
Issues one and three relied on the specific terms of the SPA therefore we will focus on issue two.
Section 10 of the Act provides that an obligation has been relevantly acknowledged if there has been (a) performance by the defender towards implement, which clearly indicates that the obligation still exists, or (b) the defender has made an unequivocal written admission clearly acknowledging that the obligation subsists.
The pursuer argued that there had been relevant acknowledgements by the defenders in both conduct and admissions. If there had been such acknowledgements, then the pursuers’ claim had not time-barred prior to the raising of the action.
The defenders argued that if any of the purported acknowledgements set out by the pursuers were upheld then these would effectively prohibit a party from contesting liability as doing so would constitute a relevant acknowledgement. More specifically, the defenders claimed that:
- the correspondence relied upon was neither sufficiently specific, nor linked to the payment obligation, nor sent in the context of negotiating a dispute.
- participation in the court action, audit process and expert determination was not linked to the payment obligation but other obligations under the SPA.
- the part payment of the EOC was an acceptance only of liability in one aspect of the claim and could not be an acknowledgement of liability for the disputed amount.
The Court identified six grounds for the pursuer’s contention, namely:
1. A letter from CRS’ solicitor dated 23 July 2015 which stated
“…confirmation of the Buyer’s will to perform its contractual obligations in good faith …”. The court considered that this referred to the obligation to make payment of the full EOC. When taken with a further reference in the letter to appointing the independent expert to “…settle the entire subject matter” this constituted a relevant acknowledgement that the obligation to pay the EOC subsisted on 23 July 2015.
2. The 2015 action in which CRS had made various admissions in their defences and consented to the orders sought. The court considered that this did not constitute a relevant acknowledgement. The defenders’ admissions that the EOC was payable were in the context of an obligation to provide information, not the obligation to pay.
3. The defenders had engaged with KPMG’s audit, including allowing access to CRS’ premises. The defenders’ engagement with KPMG related to assessment of the EOC not the payment obligation. Further, the defenders had made a relevant acknowledgement in their response to a KPMG document contrasting five examples of the defenders’ reported sales to the audit figures. That document noted that the defenders had already acknowledged they had understated two amounts. CRS responded “ok” to four of the five amounts. These, along with other correspondence during November and December 2016, collectively amounted to a written admission.
4. By emails dated 5 and 20 July 2018, CRS’ solicitors had agreed certain figures for the purpose of the EOC and made various arguments about quantification. Whilst the email of 5 July 2018 contained a written admission, the wider exchanges between the parties were in the context of seeking to negotiate, were advanced to seek a compromise and did not amount to a relevant acknowledgement.
5. CRS had docqueted the independent expert’s terms of appointment confirming they were in order and that they were engaged in the process. This was not a relevant acknowledgement. The obligation to engage in the process of appointing the independent expert was a separate obligation under the SPA. However, parts of the defenders’ submissions made in May 2019 included acceptance that a sum was due under the EOC which would constitute a relevant acknowledgement.
6. The defenders made part-payment of the EOC on 9 September 2021. This payment was part-performance and an admission of the subsisting obligation.
The court accepted that grounds 1, 3 and 6 constituted relevant acknowledgments. Each of these relevant acknowledgements restarted the prescriptive period, which had been most recently re-set on 9 September 2021
The court confirmed that the underlying obligation itself must be acknowledged, not just its value. A written admission must unequivocally acknowledge that the obligation subsists. Whether it is clear and unequivocal is a matter of interpretation. The purposes of making the admission were also relevant and a purported admission must be read in the context of the whole communications between parties.
In relation to performance, this did not mean implementation. Rather an event, when viewed in context, may provide the necessary clear indication to amount to a relevant acknowledgement along with being clear about what the obligation in question is. What amounts to performance is a question of fact and degree, but the test is a high one.
A party pursuing a claim who is facing potential time-bar arguments should carefully consider whether the defender’s conduct and correspondence in the lead up to the proceedings being raised might include a relevant acknowledgement of the claim. As demonstrated in Colquhoun, such an acknowledgment could have the effect of interrupting the prescriptive period so that the claim has not yet become time-barred.
In contrast, any party defending a potential claim should carefully consider their pre-action conduct and communications and seek to avoid accidentally making any relevant acknowledgements. Similarly, they should be careful in what they admit in any alternative dispute resolution process.
Prescription has been a complicated area in recent years with particularly harsh results for pursuers (see Midlothian Council). This case (which may yet be subject to appeal) is potentially helpful for those pursuing claims, however, we always recommend taking detailed legal advice on matters of time-bar.
Resources: Colquhoun & Ors v Clinical Research Solutions GmbH & Cromsource SRL  CSOH 96