Claims against contractors under time-barred rules
Senior Solicitor in our Glasgow office, Keith Emmerson explores a recent case which will change the way building developers can claim against sub-standard works.
Lord Doherty caused some ripples in the construction industry earlier this year with his decision in the Court of Session case of Midlothian Council v Blyth & Blyth and others. In that case, he determined that the start of the prescriptive period for financial loss is not postponed even if a claimant is unaware they have suffered detriment or that the work has not been delivered. The case was significant because in that instance, the local council was aware that it had spent money in constructing a development which had used a defective engineer’s report, which with the benefit of hindsight, was wasteful. The Council was aware that it had suffered loss, injury or damage (notwithstanding that the defects in the report had not yet been identified) which meant the five year prescriptive period had begun. The effect of the decision in this case was to narrow the scope for bringing claims for financial loss under the terms of the Prescription & Limitation (Scotland) Act 1973, which sets out time limits for bringing such claims.
However, the decision has recently been tested in a Court of Session case: Loretto Housing Association v Cruden and others, interestingly, also put before Lord Doherty. The case had been due to go to a 16-day Proof Before Answer, but following the decision in Midlothian above, the defenders sought to amend their pleadings using a similar argument.
The Pursuer, Loretto Housing Association, planned to redevelop and convert the former Duke Street Hospital in Glasgow. In 1997 it appointed Cameron Ross as structural engineers and Cooper Cromar as architects. Cameron Ross and Cooper Cromer designed the works and Cruden was appointed as main contractor in 1999, along with John Arnott Associates as clerk of works.
The work to the old hospital involved the retention and refurbishment of existing facades and roof of the four-storey building, and the demolition and renovation of its interior, creating seventeen flats and a day centre. Work began in 1999, although the building contract was not signed until 10 October 2000. Over the course of the contract, Cooper Cromer issued a number of interim valuation certificates to Cruden, certifying the value of work done to date, culminating in a certificate of practical completion on 25 October 2000. Loretto paid sums determined in the contract which had been certified by Cooper Cromer. In 2001, after completion of the works, Cooper Cromer issued a final certificate certifying the value of the contract work, and a certificate of making good defects was issued to Cruden on 23 May 2002.
Some years later, in 2013 and 2014, Loretto obtained reports on the condition of the building from third party engineers. These reports disclosed significant defects in the works: the building was unrestrained against lateral loads; the roof had been installed defectively; and there was physical damage to external stonework caused by the movement of the external walls during and following completion of the works. As a consequence, on 3 December 2015, Loretto raised an action against Cruden, as contractor, and Cameron Ross, as structural engineers for breach of contract. Cruden in turn sought contributions from the architect and clerk of works, who were joined to the action as third parties.
The position of the engineer, architect and clerk of works was that even though Loretto was not aware of the existence of defects at the date of practical completion, it had incurred wasted expenditure when it paid the contractors and was therefore aware that it had suffered loss, injury and damage more than five years before the action was raised – essentially restating the position from the Midlothian case.
However, in a brave move – given the judge was the same as the previous case - Loretto argued that Midlothian was wrongly decided and that it was not aware and could not with reasonable diligence have been aware more than five years before the raising of the action, that it had suffered loss, injury or damage as a result of the alleged breaches. Loretto held that the payments made under the building contract were effectively losses caused by the engineer’s breach of contract; and that the entitlement of Cruden to be paid arose under the contract once the payments had been certified by the architect, which was done on the basis that the engineer was satisfied with the works. Therefore, Loretto claimed these payments amounted to losses caused by the engineer’s breaches and that they were made as a result of error by the engineer. That error prevented Loretto from making a relevant claim against the engineers and Cruden for damages as result of their breach, and that the error persisted until 2013 at the earliest, when the defects were discovered.
Lord Doherty decided that the Midlothian case was not wrongly decided. However, he was able to make a distinction in this case because it was different. In Midlothian, Lord Doherty had held that the Council was bound to fail in its argument against a time-bar even if it proved everything in its pleadings. He stated:
“[Loretto] offers to prove that the engineer’s failures of inspection and supervision of [Cruden’s] work resulted in the architect not being advised by the engineer of the defects; which led to the certificates being issued without the benefit of that advice, and payment being made in terms thereof in circumstances where [Loretto] had no reason to suppose that any of the work certified had not been properly done. It offers to prove that that remained the position until 2013/14, and that it could not with reasonable diligence have discovered the error until then.”
Therefore, he was entitled to hear evidence by Proof Before Answer, either as a preliminary issue or as part of the overall dispute, before being able to conclude definitively whether the claim was time-barred.
There are several considerations which follow from this case. Firstly, the Midlothian decision does not necessarily mean that every claim is time-barred in the case where cost has been incurred but the defects have not been discovered until much later; so each case should be looked at it on its own circumstances. Secondly, leave to appeal has been granted in the Midlothian case so we may not have heard the last of it yet. Thirdly, more changes will occur when Prescription (Scotland) Act 2018 is brought into force, as this will change the position as understood under Midlothian to provide more certainty. Until that time, we may expect to see a rush of claims being raised to prevent time-bar arguments.
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