Following the decisions of the Supreme Court in David T Morrison v ICL Plastics [2014] UKSC 48 and the Inner House in Gordon’s Trust v Campbell Riddell Breeze Patterson [2016] CSIH 16, awareness of loss continues to be the determining factor. Here we take a look at the most recent Outer House case, Stewart Milne Westhill Limited –v- Halliday Fraser Munro [2016] CSOH 76.

The facts

An action was raised by property developers Stewart Milne Westhill Limited against their architects, Halliday Fraser Munro, in respect of the construction of a new office, workshop and leisure facility in Aberdeen. Practical Completion of the works was achieved in September 2008. Around three months later it became apparent that there was water ingress in the subfloor of the south wing of the office. Investigations and remedial works were carried out, the problem being treated as snagging. However in October/ November 2009 water ingress was noted again in the subfloor. This time the problem was more extensive. At this point further investigations were undertaken and it was identified that the ingress was being caused by defects in the tanking, the basement’s waterproofing. The defects required extensive remedial works.

The developer raised an action against the architects in September 2014, claiming that the architects had breached the terms of the contract in that they had either caused or materially contributed to the tanking defects in the building; and that the developer had suffered losses as a result. The action was defended on a number of fronts, one of which was that the developer’s right to pursue a claim had prescribed, as the water ingress had first occurred more than five years prior to the raising of the action.

The developer maintained that the water ingress of 2008 was not due to the tanking issues and so it was not aware of that defect more than five years prior to raising the action. The developer argued that it could not with reasonable diligence have known that it had suffered loss and damage due to the tanking issues.

What is prescription?

In Scotland there are strict time limits for bringing claims for breach of contract or negligence, set down in The Prescription and Limitation (Scotland) Act 1973. These time limits differ widely from those elsewhere in the UK.

A claim for breach of duty prescribes (or expires) after a period of five years has passed from when the breach of duty and a loss arising from it occurs. Generally speaking, thereafter it cannot be pursued in court. However, the courts have discretion under section 11(3) to extend this time limit if they can be convinced that a party was not aware and could not, being reasonably diligent, have been aware that they had suffered “loss, injury or damage” within that time frame. The Supreme Court found in the Morrison case that the five year period runs from the date upon which the claimant became, or ought to have become aware, of a loss whether or not they are aware of the breach of duty causing it.

The time limits may seem arbitrary but are designed to strike a balance between allowing sufficient time for potential claimants to investigate then make claims, whilst at the same time protecting the defender from having to face, investigate and defend a claim many years after completing a contract. When did the clock start ticking for the developer?

The tanking defect must have been in existence, although not necessarily apparent, at the point of Practical Completion in September 2008, if not earlier. The court action was not raised until September 2014 (six years later). Therefore any claim would have prescribed unless the developer could persuade the court that it was not aware, and could not with reasonable diligence have become aware, of a loss having been suffered until after September 2009 (five years prior to the raising of the action).

The pertinent question is whether, at the time of the water ingress in 2008, the developer was aware of a “loss” referrable to any breach of duty in respect of the tanking. The 2008 water ingress led to some remedial works. The cost was borne by the contractor and appeared to be successful. The court held that as the remedial works had apparently fixed the problem, in those circumstances the developer was not actually aware that it had suffered loss and damage at that time. The relevant date of awareness of loss, for the purposes of prescription, would have been around the date of the second, more extensive, water ingress in October/November 2009 and the investigations/remedial works which followed. As the clock did not start running until October/ November 2009, the claim had not prescribed.

What now?

In this particular case, the court held that the claim had not prescribed, however, in order to get to that point the cost of several days of evidence and legal argument was required.

It is better to be safe than sorry and to ensure that actions are raised within five years of the earliest point when a loss has become incurred, even if it only later becomes apparent that it was due to a breach of duty. In this case that might have been at Practical Completion, the issue of the certificate of Making Good Defects, or the discovery of a pretty persistent leak.