Mon 12 May 2014

Construction defects and prescription - ignore at your peril

Contractual claims for defects are part and parcel of life in the construction industry, but the issue of prescription and limitation in this context is all too often misunderstood with potentially significant consequences.

In Scotland, the law relating to prescription and limitation of claims is governed by the Prescription and Limitation (Scotland) Act 1973.  The principle behind the prescription of claims is that after the lapse of a certain amount of time, where a person is entitled to challenge or to make a claim and has not done so, it can be presumed that the claim has either been abandoned or satisfied.  The action is therefore time barred and no longer actionable.

Clearly, failure to appreciate the effect of the legislation fully can lead to the loss of the ability to reclaim substantial sums and the owners and tenants of properties in particular should take note.

The position in England is different, only adding to the potential for confusion.

Key timings

In Scotland, where there is a potential claim for defects at a property, the relevant points to note are:

  • Any obligation to make reparation for loss, injury or damage caused by an act, neglect or default is regarded as having become enforceable on the date on which the loss, injury or damage occurred.
  • Where a party was not aware that the loss, injury or damage caused had occurred, the relevant date is the date when they first became, or could with reasonable diligence have become, so aware.
  • The prescriptive period under the Act for claims for defects is five years. So in other words, the limitation clock starts ticking on the date that there is awareness of a defect at the property (or where there ought to have been such an awareness), and a party suffering a loss has five years from that date to raise an action.  Failure to do so will cause the right to lapse and no valid claim can be made once the period has expired.

Common Misconceptions

In our experience, there are a number of common misconceptions where time bar is a potential issue in a construction context.  The three noted below are those that we have unfortunately heard all too often when time has already run out or the end of the prescriptive period is very close.

The wrongdoer has been made aware of the claim so the clock has stopped running.

It is often thought that provided that the party against whom there is right of action has been made aware of the problem within the five year period, the clock stops ticking.  This is not the case.

The only way to make a relevant claim is to raise an action in court (or arbitration) and have papers served on the "wrongdoer" before the expiry of the five year period.  Even letters from your lawyer have no legal effect to prevent the onset of prescription.

The wrongdoer has tried to fix the defect so the clock reset when they acknowledged there was a problem

The argument that the alleged wrongdoer has acknowledged their liability can in theory "reset the clock".  For example, where there has been an attempt to replace or remedy a defect, an argument can be raised that the clock is deemed to have been reset to the date when it became apparent that the repair was unsuccessful.

It is however notoriously difficult to run a "relevant acknowledgement" argument and this will very much depend on the circumstances of each individual case.  What can be said is that it would be a mistake to assume that the clock can be "reset" easily - the prospects of successfully running this argument are generally poor in all but the most straightforward cases.

We have a collateral warranty and it says it is valid for 12 years

Often a party will have a contractual right of recourse for defects through a collateral warranty.  A market standard clause in a collateral warranty will state that the consultant or contractor's liability will be limited to a period of 12 years from practical completion of the development, after which their liability will cease.

On the face of it, such a clause would appear to be confirmation from the construction party that they accept liability for 12 years and not 5.  However, section 13 of the Prescription & Limitation (Scotland) Act provides that any provision in any agreement purporting to contract out of the 5 year prescriptive period is ineffective.  This severely limits the prospects of successfully arguing that the relevant period will be anything other than 5 years, regardless of what the agreement itself actually states.

So don't let amicable discussion take your eye off the egg timer's sand….

The issue of prescription is likely to be the first line of defence for an alleged wrongdoer if there is any question that the five year period may have come and gone.  Owners and tenants should have the five year period etched in their minds as soon as they become aware that there may be a defect that has the potential to cause a loss.

Of course, seeking to resolve the matter out of court should be encouraged - but failure to appreciate that there is a strict time limit for taking matters further could mean that all bets are off.

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