One of the most disruptive court decisions for the Scottish construction sector in recent times was the controversial Court of Session decision in Midlothian Council v. Raeburn Drilling and Geotechnical Ltd which deals with the prescription of latent defects claims. Midlothian was questioned judicially in a recent Glasgow Sheriff Court decision with some positive news for those looking to raise such claims.
Commencement of the five year prescriptive period
In terms of the Prescription and Limitation (Scotland) Act 1973 (the "1973 Act"), court proceedings in respect of any claim for breach of contract or a negligent act require to be raised within five years of the date that the breach occurred and any loss has arisen subject to extension to allow for any period when the claimant was not and could not with reasonable diligence have been aware of the loss.
The Supreme Court’s 2014 decision in Morrison v ICL Plastics established that the five year time period within which to make a claim started to run when the pursuer knew or ought to have known that a loss had been suffered, even if it was not yet clear what had caused the loss.
The Supreme Court clarified this approach in the context of economic loss in Gordon's Trustees in 2017 when the pursuer was held to have suffered a loss at the point it had incurred expenditure which turned out to be wasted, even though it was not aware at the time that the expenditure (the loss) had been caused by fault or negligence.
The court in Midlothian, purporting to apply Gordon's Trustees to a latent defects claim, took an approach that further narrowed the already difficult Supreme Court interpretation of the legislation.
The impact of Midlothian
Before the decision in Midlothian, it was generally understood that s.11(3) of the 1973 Act operates to postpone the start of the five-year negative prescriptive period for latent construction defects claims until the pursuer is aware (or could with reasonable diligence have become aware) that a loss has been suffered. It was not necessary for the pursuer to understand what the cause of the loss was nor whether anyone had legal liability for it but they must have at least known, or could reasonably have discovered, that there was a defect before the clock started ticking on the claim.
After Midlothian, the five year clock may start sooner; at the point when "wasted expenditure" is incurred, even if there is no reason to believe that a legal claim exists at the time the expenditure is incurred. This is especially problematic for latent defects which may not have manifested within five years from the date that the "wasted expenditure" on construction was incurred. According to the Midlothian reasoning, only knowledge of the expenditure is required for the clock to start. The fact that it is impossible to know that the expenditure was wasted is irrelevant. On this basis, latent defects will often than have prescribed before they have even manifested.
WPH Developments Limited v Young & Gault LLP
In WPH Developments Limited v Young & Gault LLP Sheriff Reid was unable to accept that this could be sound law and refused to apply hindsight to the facts and circumstances in the way that is demanded by the Midlothian approach. The decision distinguishes between awareness that expenditure is being incurred and awareness that loss has occurred and criticises the Midlothian decision for wrongly conflating the two concepts.
This is an encouraging ruling for pursuers who have suffered losses arising from latent defects in construction more than five years after practical completion. It suggests a return to the more logical pre-Midlothian position where claims cannot prescribe before they could have been raised. As it is a Sheriff Court judgment though it does not have the same authority as Midlothian and it is not yet clear whether it will be appealed.
Prescription (Scotland) Act 2018
Planned new legislation will eliminate much of the uncertainty around prescription of new claims for latent defects. The Prescription (Scotland) Act 2018 received Royal Assent 18 months ago, on 18 December 2018, but it has not yet been implemented.
When it does come into force, the five-year prescriptive period will not begin until the pursuer has actual knowledge (i) that loss, injury or damage has occurred, (ii) that the loss, injury or damage was caused by a person’s act or omission, and (iii) of the identity of that person.
The legislation will not have retrospective effect and there is speculation that one of the factors causing delay in implementing it is the difficulty with introducing fair rules to deal with the transitional period. A consultation on that point is expected before the Act's provisions become operable.
How to protect your claim from prescribing
It is vital to seek legal advice on construction defects – latent or otherwise - as soon as they are discovered. A specialist construction solicitor will establish the appropriate legal recourse to make or preserve a claim and advise on the best course of action. Raising protective court proceedings at the earliest opportunity is often the most reliable way to preserve a claim.
Parties should avoid being drawn into protracted negotiation or correspondence with contractors or consultants about the defects, even if they are making positive noises about rectification, as this may be a strategy aimed at eroding time.
Although the strict Midlothian approach to latent defects claims won't be the law forever, it is currently the highest authority on this point so pursuers and their legal advisers will continue to take a cautious approach and defenders will continue to argue that any claim five years after the expenditure is time barred.
Please contact our specialist construction law team for advice in relation to defects claims, protective proceedings and resolving construction disputes.