Contractual relationships are often such that, when claims arise between parties, for one reason or another it is decided not to pursue debts immediately. This is ordinarily to do with the ongoing relationship and goodwill between parties. In the context of the construction industry historical debts like retention were all to often forgone as parties concentrated on new projects and new sources of business. The principle behind the prescription of claims is that, after a lapse of substantial amount of time, where a person is entitled to challenge or make a claim and has decided not to do so, then it can be presumed that the claim has been abandoned or satisfied. The action is therefore no longer maintainable or actionable.
In Scotland, the question of whether or not a claim is time barred is governed by the Prescription & Limitation (Scotland) Act 1973 (“the Act”). Any claims which arise in respect of obligations to pay money or an obligation arising from a breach of contract which have subsisted for five years continuously and in that time the creditor or person owed, has not raised an action nor has the debtor, or person owing, acknowledged the debt, it is then extinguished.
The relevant date for calculation of the prescriptive period is ordinarily when the loss or wrong occurred or, in the case of for example defects in a construction project, when the Employer, or his successor, knew or ought reasonably to have known that the defects existed and that as a result of these defects a loss was being suffered by them. Damages can be claimed, in Scotland, up to five years from that date. Sometimes, the date will be clear (from an invoice for example), however on some occasions further investigations will be required.
Where the creditor was not aware and could not with reasonable diligence have become aware that the loss or damage has occurred, then the period will run from the date when he was aware or should with reasonable diligence have become aware. This could apply to latent defects which come to light after a considerable time. Any defect which should have been noticed but is not noticed is not actionable five years from the period when it should have been apparent.
It can sometimes be difficult to show when a person did, or should have become, aware that injury had been suffered. Where, for example, the source of a defect is not established it may be arguable that the defect is a progressive one which may or may not have been discovered until some time after it had started. However, it is best to be cautious and raise proceedings within five years from the earliest point when they should or could have been aware. If, for example, parties are engaged in negotiations regarding the payment of an invoice or the rectification of any defect in a building then an action can be raised and put on hold. While this would incur some expense for the claimant, it would protect their position in the event that the negotiation was unsuccessful.
In order to protect the position of any creditor where there is doubt regarding the time limits a court action, or arbitration should be raised.
Although five years can seem like a long time, it passes very quickly. It is always best to look at the earliest possible date when the prescription clock could start running. It is better to raise a court action and have it sisted than to lose the chance to raise proceedings at all.