Prescription and limitation operates as a time-bar of claims. In Scotland, claims for latent defects, as with other claims, can no longer be made when the time-bar period is up. A feature that interests lawyers particularly is that in Scotland the underlying obligation of the responsible party to compensate the wronged party is itself extinguished through prescription when the time-bar period is up. In England and Wales it is only the ability to make a claim that ends, through limitation. However, the effect is the same.
There is a public policy behind prescription and limitation. The purpose of the rules is to avoid ‘stale’ claims being made where the availability and reliability of evidence has diminished through the passage of time. Also, there should be certainty so that any party can know that with the passage of time the risk of a legal claim reduces. On the other hand, there is a need for a wronged party to have a reasonable opportunity to investigate and bring a claim. In the case of a latent defect, the rules need to allow for the fact that the circumstance giving rise to a claim will by definition have lain hidden for a period of time. Also, when the latent defect emerges, it will often not be immediately clear what has caused the defect or who might be responsible. The rules and time periods are set to balance out these considerations.
The statutory rules
The law of prescription and limitation is statute based, governed in Scotland by the Prescription and Limitation (Scotland) Act 1973 (the “1973 Act”). As noted in a previous article (Prescription and Limitation: differences north and south of the border), different time limits and rules apply as between Scotland and England and Wales. This means that in a cross border contract it is sometimes possible to choose where to raise a defects claim, in order to utilise the time-bar regime that is more favourable to the particular claim.
In Scotland, in general terms, a latent defects claim must be made within five years of the date when the claimant knew of a defect causing loss, or ought with reasonable diligence to have known of it. The five year period is intended to be sufficient in public policy terms to allow the claimant to investigate a claim and then raise it. However, if the claimant could have discovered the latent defect at an earlier date by undertaking reasonable steps to investigate it, then the five year period will be deemed to start at that earlier date.
A significant change in approach
Up until 2014, the Scottish courts and practitioners had understood that the five year time-bar period would only start once the wronged party knew that a loss had been suffered and that loss had been caused by a breach of contract or negligence, albeit without needing to know who was the responsible party. That seemed to be how the 1973 Act was to be interpreted. This approach was turned on its head by the Supreme Court in David T Morrison & Co Ltd v ICL Plastics Ltd & Others, 2014.
In that case, an explosion occurred in ICL’s plastics factory in Glasgow. Morrison’s shop was damaged by the explosion. However, the cause of the explosion was unknown. A public enquiry followed, to establish the circumstances and cause of the explosion. It was only then that Morrison pursued a claim for the shop damage. This was more than five years after the damage occurred. The Supreme Court held that the five year time-bar period under the 1973 Act had started to run as soon as the damage occurred, causing loss, notwithstanding that the cause of the damage was unknown. The focus of the five year time-bar period was to be the date when loss occurred, not what had caused that loss.
Whilst this approach was a substantial change from previous practice, it could at least be rationalised in the circumstances of that case. However, a more difficult set of circumstances soon came before the courts in Gordon’s Trustees, 2015. Here, the claimant had asked its solicitors to serve Notices to Quit on the tenant of ground that it owned in order to recover possession from the tenant. The tenant refused to comply. Therefore, the claimant raised court proceedings to remove the tenant. However, those proceedings were unsuccessful because the Notices to Quit were held to be invalid. The claimant landlord then turned to sue his solicitors for professional negligence in their drafting of the defective notices. This was more than five years after the defective Notices to Quit had been served and more than five years from the date when the tenant ought to have removed. The claimant landlord, however argued that he could not have known that he had suffered loss through the defective Notices to Quit until the court had declared the Notices to be invalid in his proceedings to remove the tenant. But following Morrison, the court held that the claimant had suffered loss at an earlier date, either at the point when the tenant failed to remove, causing a diminution in the value of the land through its continued occupation by the tenant, or when the claimant paid legal costs in raising the court action to remove the tenant.
The practical effect of the change in approach
The practical effect of the court’s approach in Gordon’s Trustees was that, in order to defeat time-bar, the claimant should have raised proceedings for professional negligence against its solicitors before it knew whether or not the Notices to Quit were valid. This has encouraged speculative proceedings, indeed such proceedings are presently necessary, in order to defeat any question of time-bar. A claimant, to be safe, should speculate that there has been negligence or breach of contract and who is the responsible party. This is an undesirable position. It has led to more actions being raised, against more parties, and at a premature stage, where reasonable investigations have not completed.
Changes around the corner
Such has been the consternation caused by the change of approach, the Scottish Law Commission (“SLC”) was quickly tasked to review the position, particularly regarding latent defects claims, in a consultation which ended last month: see the SLC’s consultation paper entitled: Discussion Paper on Prescription. It is likely that the result will be either a return to the pre-Morrison position or a possible development of that position. This is because the post-Morrison position is widely seen to have upset the careful public policy balance on the law of prescription, particularly for latent defect claims. In the meantime, those pursuing latent defects claims in Scotland are well advised to be quick off the mark in raising court proceedings, in order to protect against those claims becoming time-barred.