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All Change for Latent Defects - Times are changing in Scotland

  • United Kingdom
  • Construction and engineering

24-05-2022

Why should I read this?

The laws governing how long a party has to make a claim for latent defects differ between Scotland and England/ Wales, and are about to change in Scotland.  

What are the relevant periods?

In England and Wales, the “limitation period” for bringing a claim is governed by the Limitation Act 1980.  Claims under contracts that are simply signed can be brought within 6 years from completion of the project, and under contracts executed as a deed, for 12 years.  Latent defects are subject to a long stop of 15 years from completion and need to be brought 3 years from the date of knowledge. This date of knowledge has similar nuances to the Scots discoverability test discussed below.

In Scotland, the “prescriptive period” for bringing a claim for breach of contract is 5 years from the date of the loss - irrespective of how a contract is executed - under the Prescription and Limitation (Sc) Act 1973.  However, the latent defects exception to this statutory time limit for claims in Scotland is about to change. 

Changes for latent defect claims in Scotland from 1 June 2022

Changes to the prescriptive period for latent defects come into force on 1 June 2022. This will affect any claims that are not already out of time by 31 May 2022.  

At the moment, most claims must be raised within 5 years of the date when the loss occurred. But latent defects often neither appear nor are known about until significantly later. So Scots law provides an exception to the 5-year period with its “discoverability test”. 

For latent defects, the 5-year prescriptive period runs from the date when the claimant - “pursuer” in Scotland - knew, or ought with reasonable diligence to have known, of the defect causing loss.  In other words, the starting date for the 5-year period can be postponed to the point when the pursuer knew it had suffered a loss and knew that loss was caused by breach of contract - even if the pursuer did not know who was responsible. 

This discoverability test crucially determines whether a claim arising from latent defects is out of time. As this time bar prevents any claim being pursued, the courts have carefully scrutinised when that 5-year period starts.

The existing discoverability test

A Supreme Court decision in 2014 (David T Morrison & Co Ltd v ICL Plastics Ltd & Ors1) altered our understanding of how the discoverability test operates. Essentially, the courts decided that any loss started the prescriptive period – irrespective of whether the potential pursuer had any idea that something had gone awry or even that it had suffered a loss. 

This interpretation has led to harsh results for pursuers. For example, loss was interpreted as suffered when the pursuer paid for legal services - even though the pursuer did not know, and had no reason to suspect, that there was any problem with those services when the payment was made. 

The practical impact was that a pursuer did not need not know that it had a right to claim, or the identity of the perceived wrongdoer, for the 5-year period to start. The most important factor became the date of the loss. 

It has been widely accepted that this interpretation of the law was overly favourable to defenders and tough for pursuers of latent defects. 

The new Scottish test

Section 5 of the Prescription (Sc) Act 2018, in force from 1 June 2022, seeks to redress this imbalance and revert to how the law was thought to operate before 2014.

Section 5 amends the discoverability test. As a result the 5-year period will begin only when a pursuer is aware, or with reasonable diligence could have been aware:
  • that loss, injury or damage has occurred, and
  • that the loss, injury or damage was caused by the acts or omissions of another party, and
  • of the identity of that party.
In other words, the 5-year period will only begin when the pursuer knows not just that it has suffered a loss, but also that there has been fault of some kind, and the pursuer can ascertain who caused the loss. 

This is a significant change which is likely in practice to extend the prescriptive period for latent defects and allow more cases to continue. The focus of debate will be less on the date the loss arose but more on what the pursuer knew and when. Should the pursuer have known about the loss at an earlier date? What investigations were, or should have been carried out?  

There will also be some teething issues about whether the claim was prescribed by 31 May 2022 – if so, the new changes will not assist. If the defender can successfully argue that a case is already time- barred by 1 June, the new wider test will not apply. 

Introducing standstill agreements to Scotland

Also on 1 June, Scotland welcomes Standstill Agreements, enabling parties to agree to extend the prescriptive period for any claim by one year. Although common in England and Wales for decades, standstill agreements have not previously been used in Scotland. This change should be welcomed by parties keen to avoid the costs and time of litigation, as this additional period can be used to more amicably resolve disputes. 

What to do if you have a claim for a latent defect

Although the prescriptive period remains 5 years in Scotland, from 1 June 2022:
  • you can bring a claim beyond that prescriptive period if it is brought within 5 years from when you are aware or with reasonable diligence could have been aware not only that the loss has occurred but that it was caused by the acts or omissions of another party, and you are also aware of the identity of that party.
  • you can enter into a standstill agreement to extend the 5-year period by one year for all claims.

 


1.  [2014] UKSC 48

 

Why should I read this?
Claims for defects which appear years after a project is complete can escape the strict periods for bringing claims under exceptions for these ‘latent’ defects. The laws governing how long a party has to make a claim for latent defects differ between Scotland and England/ Wales, and are about to change in Scotland.  
What are the relevant periods?
In England and Wales, the “limitation period” for bringing a claim is governed by the Limitation Act 1980.  Claims under contracts that are simply signed can be brought within 6 years from completion of the project, and under contracts executed as a deed, for 12 years.  Latent defects are subject to a long stop of 15 years from completion and need to be brought 3 years from the date of knowledge. This date of knowledge has similar nuances to the Scots discoverability test discussed below.
In Scotland, the “prescriptive period” for bringing a claim for breach of contract is 5 years from the date of the loss - irrespective of how a contract is executed - under the Prescription and Limitation (Sc) Act 1973.  However, the latent defects exception to this statutory time limit for claims in Scotland is about to change. 
Changes for latent defect claims in Scotland from 1 June 2022
Changes to the prescriptive period for latent defects come into force on 1 June 2022. This will affect any claims that are not already out of time by 31 May 2022.  
At the moment, most claims must be raised within 5 years of the date when the loss occurred. But latent defects often neither appear nor are known about until significantly later. So Scots law provides an exception to the 5-year period with its “discoverability test”. 
For latent defects, the 5-year prescriptive period runs from the date when the claimant - “pursuer” in Scotland - knew, or ought with reasonable diligence to have known, of the defect causing loss.  In other words, the starting date for the 5-year period can be postponed to the point when the pursuer knew it had suffered a loss and knew that loss was caused by breach of contract - even if the pursuer did not know who was responsible. 
This discoverability test crucially determines whether a claim arising from latent defects is out of time. As this time bar prevents any claim being pursued, the courts have carefully scrutinised when that 5-year period starts.
The existing discoverability test
A Supreme Court decision in 2014 (David T Morrison & Co Ltd v ICL Plastics Ltd & Ors)  altered our understanding of how the discoverability test operates. Essentially, the courts decided that any loss started the prescriptive period – irrespective of whether the potential pursuer had any idea that something had gone awry or even that it had suffered a loss. 
This interpretation has led to harsh results for pursuers. For example, loss was interpreted as suffered when the pursuer paid for legal services - even though the pursuer did not know, and had no reason to suspect, that there was any problem with those services when the payment was made. 
The practical impact was that a pursuer did not need not know that it had a right to claim, or the identity of the perceived wrongdoer, for the 5-year period to start. The most important factor became the date of the loss. 
It has been widely accepted that this interpretation of the law was overly favourable to defenders and tough for pursuers of latent defects. 
The new Scottish test
Section 5 of the Prescription (Sc) Act 2018, in force from 1 June 2022, seeks to redress this imbalance and revert to how the law was thought to operate before 2014.
Section 5 amends the discoverability test. As a result the 5-year period will begin only when a pursuer is aware, or with reasonable diligence could have been aware:
that loss, injury or damage has occurred, and
that the loss, injury or damage was caused by the acts or omissions of another party, and
of the identity of that party.
In other words, the 5-year period will only begin when the pursuer knows not just that it has suffered a loss, but also that there has been fault of some kind, and the pursuer can ascertain who caused the loss. 
This is a significant change which is likely in practice to extend the prescriptive period for latent defects and allow more cases to continue. The focus of debate will be less on the date the loss arose but more on what the pursuer knew and when. Should the pursuer have known about the loss at an earlier date? What investigations were, or should have been carried out?  
There will also be some teething issues about whether the claim was prescribed by 31 May 2022 – if so, the new changes will not assist. If the defender can successfully argue that a case is already time- barred by 1 June, the new wider test will not apply. 
Introducing standstill agreements to Scotland
Also on 1 June, Scotland welcomes Standstill Agreements, enabling parties to agree to extend the prescriptive period for any claim by one year. Although common in England and Wales for decades, standstill agreements have not previously been used in Scotland. This change should be welcomed by parties keen to avoid the costs and time of litigation, as this additional period can be used to more amicably resolve disputes. 
What to do if you have a claim for a latent defect
Although the prescriptive period remains 5 years in Scotland, from 1 June 2022:
you can bring a claim beyond that prescriptive period if it is brought within 5 years from when you are aware or with reasonable diligence could have been aware not only that the loss has occurred but that it was caused by the acts or omissions of another party, and you are also aware of the identity of that party.
you can enter into a standstill agreement to extend the 5-year period by one year for all claims.