Kathryn Kelly: A question of knowledge – defects, the Midlothian case and the time for bringing an action in Scots Law



When a defect becomes apparent in a building or structure, how long does the owner have to make a claim? Dentons associate Kathryn Kelly explains more.

Kathryn Kelly

In Scotland, defects claims have to be made within five years. Time starts to run when loss, injury and damage occurs (section 11(1) of the Prescription and Limitation (Scotland) Act 1973). The start date can be postponed if the defect is latent. In that event, time starts when the person with the right to claim is aware (or could with reasonable diligence have become aware) that loss has occurred (see section 11(3) of the 1973 Act and the case of David T Morrison & Co Limited v. ICL Plastics Limited & others [2014] UKSC 48).

It does not matter if or when the person with the claim becomes aware that someone else caused the loss. Time will still run.

Midlothian and beyond

When does loss occur?

Applying (many have argued incorrectly) the principles of the Supreme Court decision of Gordon’s Trustees v. Campbell Riddell Breeze Paterson LLP [2017] SLT 1287, the judge in the Outer House case of Midlothian Council v. Blyth & Blyth [2019] CSOH 29 decided that the clock starts to tick from the point at which wasted expenditure is incurred. This is regardless of whether or not it was known at the time that the expenditure would actually be wasted.

Midlothian concerned a housing development. Before construction, consultants had assessed the risk of ground gas to be “low”. Relying on the assessment, the development was built without a gas defence system. The development later had to be demolished due to the presence of gas.

The key question in Midlothian was when the council became aware that loss had occurred. The council argued that it suffered a loss when the housing development became uninhabitable in 2013. It raised the court action, within five years of that date, in 2018.

The judge disagreed. He decided that, as soon as the council had accepted the engineer’s advice in relation to the “low” ground gas risk and acted upon it (i.e. by building the development between 2007 and 2009), there was loss (namely, the wasted expenditure incurred in the building process). The fact that the council was not aware that the expenditure would be wasted did not matter. The conclusion was that the council had raised its claim too late.

Particular difficulty for construction projects

A number of cases have been decided since the Midlothian decision, applying a similar analysis. Midlothian has created a difficult situation for employers on construction contracts. If time runs from when expenditure on the project is incurred, many claims will have prescribed (expired) before the employer on a building project is even aware that anything is wrong.

Challenge to the Midlothian position

The case of WPH Developments Limited v. Young & Gault LLP [2020] SC GLA 27 is perhaps the light at the end of the tunnel. In WPH Developments, a property developer engaged an architect to draw up plans. The plans were prepared by the architect in 2012. There was an error in the plans. They showed the boundary of the developer’s site outwith the actual boundary of the property. The development was built. The developer was only alerted to the encroachment onto the neighbouring land in February 2014, following which he demolished and relocated the boundary wall. A claim was raised by the developer against the architect in November 2018.

Relying on Midlothian, the architect argued that any claim against him had prescribed. His position was that since the developer was aware it was incurring expenditure when it engaged the contractors to build the housing development (albeit only in hindsight known to be wasted expenditure), the time for bringing an action had started to run then and had since expired.

Sheriff Reid took issue with the analysis in Midlothian stating: “To apply hindsight to establish a creditor’s actual or constructive knowledge at a point in time is conceptually illogical.” The Sheriff expressed the view that, in respect of section 11(3) of the 1973 Act, Midlothian had been wrongly decided. In particular, he made the point that awareness that expenditure is being incurred is not necessarily the same as awareness that loss has occurred.

Caution

This is an ever-evolving area of law but Sheriff Reid’s decision in WPH Developments is a valuable contribution to the debate. There are rumours of an appeal so it may be that this issue will soon come before the Inner House for clarification.

The Prescription (Scotland) Act 2018, once implemented, will resolve many of the current difficulties in this area of law. However, as things stand, there has been no update from the Scottish Government as to when the Act may come into force. Regardless of when this happens, the Midlothian/WPH Developments issue will remain relevant as the Prescription (Scotland) Act 2018 will not have retrospective effect.

In the meantime, until this issue is sorted out, those who have claims to make should always take a cautious approach and not leave it too long.

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