Lewis Kemp: Prescription in construction claims – is arguing induced error the answer?
Harper Macleod’s Lewis Kemp looks at a recent case which has taken a new approach to dealing with the problematic application of prescription in construction cases.
The traditional understanding of the law of prescription in Scotland, which extinguishes certain rights and obligations after the applicable time period, has been turned on its head since the Supreme Court judgment in Morrison v ICL Plastics Ltd in 2014 triggered a series of decisions on the operation of section 11(3) of the Prescription and Limitation (Scotland) Act 1973.
These cases have narrowed the ambit of section 11(3) such that it is virtually redundant and many claims are now understood to have prescribed before the pursuer could, with reasonable diligence, have known that there was a problem.
In the latest construction case to be caught up in preliminary legal arguments about prescription, the pursuer, unlikely to succeed in changing the court’s mind on the interpretation of section 11(3), is looking to section 6(4) of the 1973 Act to keep its claim alive.
Prescription in construction cases
Prescription has long been problematic in construction cases, particularly where the cause of action is a latent defect; one present during construction but only emerging years after completion of the work. The development of the law of prescription through cases since Morrison has compounded the difficulties in such cases.
For example, in Midlothian Council v Raeburn Drilling, a mistake was made at the ground investigation stage of a housing development which meant that, unbeknown to the council, the whole cost of the development was wasted expenditure as soon as it was paid because it was “fated to be defective” and the houses subsequently all had to be demolished.
Applying the principles developed by the Supreme Court in Gordon’s Trustees, any action for reparation against the allegedly negligent ground investigation consultant had to be raised within five years of the council making payment for the development because the council knew that it had made those payments in reliance on the site investigation advice, even if it was not aware that said expenditure was wasted because it would fail to achieve its purpose.
As it turned out, the first indication of a problem was four and a half years after completion when a resident fell ill at one of the properties. It was only after investigation that this incident was established to be the result of ingress of ground gas into the property from former coal mine workings. The claim had prescribed by the time it could, with reasonable diligence, have been discovered that a ground gas protection system should have been incorporated into the design of the development.
Moving on from Midlothian
Fast forward six months to October 2019 and Lord Doherty has issued another judgment in a construction case where obligations to make reparation have arguably been extinguished by prescription.
Loretto Housing Association v Cruden Building & Renewals and another involves the redevelopment of a former hospital building into flats. The external façade of the building was retained but the inside was completely demolished and replaced. A combination of failures by the structural engineer and the contractor left the refurbished building with dangerous movement in the external walls and a defective roof, all requiring substantial remediation.
The pursuer submits that these defects were only discoverable when damage to stonework was investigated in 2013. The structural engineer and third parties, bolstered by the Midlothian decision, aver that the pursuer suffered loss when it paid for the defective works during the construction phase in reliance on the structural engineer’s advice. They argue that the five-year prescriptive period started on or before the date of practical completion.
Interestingly, the pursuer is represented by the same legal team as represented the pursuer in Midlothian. Their primary position is that Midlothian was wrongly decided on the basis that Gordon’s Trustees does not set down a general rule that the prescriptive period commences on the date when expenditure, which is subsequently found to be wasted, was incurred. Lord Doherty rejected this submission and adhered to his reasoning in Midlothian.
Section 6(4) of the Prescription and Limitation (Scotland) Act 1973
Having preserved its arguments on the impact of Gordon’s Trustees in case this action goes to appeal, the pursuer then argued that the position in Loretto is distinguishable from Midlothian on several grounds: the engineer maintained an involvement throughout the project; the contractual payments to the contractor were not incurred in reliance on the engineer’s advice; the defects were caused by a combination of failures by both the engineer and the contractor; and the whole building did not require to be demolished so the contractual payments were not “abortive expenditure”.
The pursuer also submitted that, to the extent that payments made under the construction contract were “wasted expenditure”, they were not directly caused by the engineer’s failures. The pursuer knew it had made payments for the work done by the contractor but these were contractual payments triggered by the architect’s certification, not by the engineer’s breach of contract.
Significantly, the pursuer goes on to argue that, if that position is wrong and the engineer’s breach was an effective cause of the expenditure, such expenditure was made in error and the start of the prescriptive period should be postponed in terms of section 6(4) of the 1973 Act.
In support of this section 6(4) argument, the pursuer offers to prove that the engineer’s failures of inspection and supervision of the contractor’s work resulted in the architect issuing certificates without the benefit of the engineer’s correct advice. Payment was therefore made in circumstances where the pursuer had no reason to suppose that any of the work certified had not been properly done.
Lord Doherty discloses very little of his thinking in the judgment issued following a debate on the relevancy of these arguments but he has agreed to allow a proof of some sort – whether a preliminary proof on prescription or a proof before answer on the whole dispute is yet to be determined – to allow the issues to be explored further.
It is clear that prescription remains problematic for pursuers pending implementation of section 5 of the Prescription (Scotland) Act 2018. The new legislation will bring clarity to the starting point for the prescriptive period for obligations to pay damages but only for claims raised after it is commenced.
Meantime, it will be interesting to see how the pursuer’s arguments in this case play out at further procedure. Is it a sufficiently different claim to be able to distinguish the Midlothian decision, which Lord Doherty has expressly adhered to, on the principal arguments? If not, will the section 6(4) induced error position, which was not a factor in Midlothian, be enough to keep the claim alive?
- Lewis Kemp is a senior associate in the dispute resolution team at Harper Macleod LLP and regularly acts in relation to the full spectrum of contentious property matters