Construction Prescription Reform Put To The Test

The first reported decision on the 2018 reforms to Scotland's prescription rules has produced a surprising result for the construction industry and those dealing with latent defects claims.

In Ogilvie Construction Ltd v M1 RE Glasgow Ltd, the court held that a claim may begin to prescribe before the claimant knows – or could reasonably know – that a defect exists.

The decision is the first to consider the amended “discoverability” provisions introduced by the Prescription (Scotland) Act 2018 and could have significant implications for construction professionals, developers, property owners and their advisers.

The outcome is striking. A claim may be lost before the claimant realises that anything has gone wrong. That is likely to cause concern in sectors such as construction and property investment, where defects can significantly reduce property values.

Background

Under Scots law, obligations to pay contractual damages are generally subject to a five-year prescriptive period or time-bar. In broad terms, if proceedings are not raised in time, the claim is extinguished, regardless of its merits.

Identifying when that five-year clock starts to run is often more difficult, particularly where the defect or damage is not immediately apparent. Scots law, like many other legal systems, has rules which are intended to postpone the start of the 5-year period until the wronged party has a degree of knowledge about the existence of a claim (alongside separate rules addressing fraud, error and legal disability).

However, there is a relatively broad consensus that court decisions interpreting those ‘discoverability’ rules over the last 10 years have seen the balance tilt too far in favour of defenders. Amendments were therefore introduced by the Prescription (Scotland) Act 2018, following recommendations by the Scottish Law Commission, in an attempt to create a fairer and more workable test.

This case provided the first significant opportunity to test those amendments.

The dispute before the court

It arose out of the construction of a Motel One hotel at Oswald Street in Glasgow. M1 RE Glasgow Ltd (“M1 RE”) was the employer and Ogilvie Construction Ltd was engaged as the design and build contractor. Ogilvie appointed Leach Rhodes Walker (“LRW”) as architect for the project.

At the point when construction commenced, LRW had specified that the external cladding should contain 70mm of Kingspan Kooltherm K15 insulation, a product which later came under intense scrutiny following the Grenfell Tower fire. Following the Grenfell Tower disaster in 2017, the cladding design was reviewed and redesigned. This resulted in LRW specifying a further 30mm of K15 insulation (the “Revised Design”).

Ogilvie raised proceedings against LRW in 2020 for the costs of implementing the Revised Design, alleging a breach of contract by LRW in producing the initial design.

Before those proceedings had been resolved, LRW informed Ogilvie in 2023 that the Revised Design was itself defective. Ogilvie then sought to extend its 2020 claim to include losses arising from the Revised Design, as well as certain cavity barrier defects that had also come to light.

LRW’s response was that Ogilvie’s claims relating to the Revised Design and cavity barriers had prescribed and were therefore extinguished. Ogilvie asked the court to determine whether that was correct.

Ogilvie also sought clarification as to whether its obligations to its employer, M1 RE, in relation to the original design, Revised Design and cavity barrier defects had also been extinguished by prescription.

When does the five-year period start?

The starting point for the court was the Prescription and Limitation (Scotland) Act 1973, as amended by the Prescription (Scotland) Act 2018. For obligations to pay damages, section 11(1) provides the basic rule – the prescriptive period begins when “loss, injury or damage” occurs. The “discoverability test” is then used to determine whether that start date should be postponed.

The court applied previous decisions and held that “loss, injury or damage” occurs when physical damage or financial loss exists as an objective fact. Financial loss could include wasted expenditure.

Crucially, Ogilvie and M1 RE did not need to know they had a legal claim, realise they had suffered a ‘detriment’, or know who had caused the loss.

Applying that approach, the court concluded that Ogilvie had entered a state of detriment (economic loss) as a result of a breach of contract.

Ogilvie had suffered economic loss when it incurred wasted expenditure implementing the relevant designs. That occurred in April 2017 for the original design, in or around October 2017 for the Revised Design, and by at least February 2017 for the cavity barrier works.

M1 RE, meanwhile, suffered economic loss when the non-compliant building elements were installed. At that point, it was paying for a building that was worth less than it should have been.

This meant that, with the exception of Ogilvie’s 2020 claim concerning the original design, the claims had all been raised outside the five-year period. They would therefore be time-barred (prescribed) unless the start date of the five-year period could be postponed by the discoverability test or another statutory rule.

The amended “discoverability test”

Section 11(3), as amended by the Prescription (Scotland) Act 2018, postpones the start of the five-year period if, at the relevant time, the creditor was not aware, and could not with reasonable diligence have been aware:

• That loss, injury or damage has occurred;
• That the loss, injury or damage was caused by a person’s act or omission; and
• The identity of that person.

These are three of the key elements required to bring a legal claim.

Ogilvie argued that it did not know the remedial cladding design was defective until May 2023 and did not discover the cavity barrier issues until December 2023. Accordingly, it argued that the prescriptive clock could not have started before then.

M1 RE advanced a similar argument, maintaining that it did not have the necessary awareness until even later, in 2024.

The court rejected both arguments.

It held that the 2018 amendments did not change the established meaning of “loss, injury or damage”. It was therefore enough for M1 RE and Ogilvie to know the factual circumstances that constituted the loss. In this case, that was when they knew they had incurred expenditure by paying for the design work. They did not need to know at that stage that the expenditure would ultimately prove to be wasted.

The court acknowledged that it was not easy to apply the second limb of the test — whether the loss was "caused by" a person's act or omission — where the claimant did not need to appreciate that anything had, in fact, gone wrong.

Nevertheless, it concluded that the second and third limbs were satisfied because the parties knew that the work had been done in accordance with a design prepared by an identifiable party. In other words, M1 RE and Ogilvie knew who had been involved and caused the loss, even if they did not know at that point that the design was defective.

That approach led the court to a potentially harsh conclusion: the prescriptive clock had started running in 2017, before either Ogilvie or M1 RE appreciated that the Revised Design or cavity barriers were defective.

Why this matters for construction and property claims

The 2018 reforms were widely understood as an attempt to soften some of the harsher consequences of earlier case law. While the court recognised the severity of the outcome, it considered itself sufficiently constrained by the statutory wording and binding case law.

The practical implications could be significant, particularly for construction and property professionals and their advisers.

Take the position of a property owner or developer who unknowingly acquires a building affected by a latent defect that materially reduces its value. Following this decision, there is a real possibility that prescription could begin running when the defective work is carried out or paid for, rather than when the defect is discovered.

As LRW put it in its submissions, “it is not a requirement that the creditor is aware that something has gone wrong and that they have suffered a detriment before the prescriptive period starts running”.

So, unless the decision is appealed or the legislation is amended again, parties involved in Scottish construction projects, property investment and property development will need to proceed on the basis that claims may prescribe long before defects come to light.

That is a sobering prospect, and one that may be difficult to reconcile with many people's understanding of fairness and common sense.