Legal time-bar for latent damages claims - changes to the discoverability test under Scots law
Prescription is the legal rule in Scotland that prevents a person from pursuing their legal rights to a claim after a certain time period has elapsed (the equivalent in England is limitation). A claim ‘prescribes’ when the relevant time period runs out (known as the ‘prescriptive period’). For contractual claims, the prescriptive period is five years. However, the start date at which that five-year period begins can be difficult to determine, leaving a pursuer in an uncertain position as to their ability to pursue their claim.
On 1 June 2022, section 5 of the Prescription (Scotland) Act 2018 (‘the 2018 Act’) will come into force. This will amend the Prescription and Limitation (Scotland) Act 1973 (‘the 1973 Act’), and provide further clarity on the prescriptive period that applies to contractual claims in Scotland.
Prescription in Scotland
The start of the prescriptive period may be delayed in certain circumstances, including where the pursuer was not aware, and could not (with reasonable diligence) have been aware that the loss, injury, or damage had occurred (section 11(3) of the 1973 Act). This is known as ‘the discoverability test’.
The discoverability test has caused the most difficulty in practice, particularly with the discovery of latent defects which have come to light many years after completion of a contract with some pursuers being denied their right to assert their claims due to the passage of time. It has also been argued that the current law has been overly favourable to defenders. The introduction of section 5 of the 2018 Act seeks to reset the balance.
The 2018 Act will introduce a change to the wording of section 11(3) of the 1973 Act to simplify the discoverability test. This change clarifies that the start of the prescriptive period in a contractual claim begins when the person who suffered the loss is aware, or with reasonable diligence could have been aware:
(a) that loss, injury or damage has occurred;
(b) that the loss, injury or damage was caused by a person’s act or omission, and;
(c) of the identity of that person.
The changes, effective from 1 June 2022, will require all of the above three elements to be in the pursuer’s knowledge (or to potentially be in the pursuer’s knowledge, if the pursuer were to exercise reasonable diligence) in order to meet the discoverability test. This will delay the start of the prescriptive period in many more cases than at present.
Judicial analysis of the discoverability test since 2014 has meant that the prescriptive period can start running for a pursuer where it has incurred a loss, whether or not it knows that loss is the result of a breach of contract or negligence. This altered the previous approach. The changes are intended to provide a more balanced approach as between pursuers and defenders.
It is likely that the changes will lead to a sharper focus on the ‘reasonable diligence’ aspect of the test. In considering this, the courts will need to consider what knowledge the pursuer actually had, and what steps were taken or should have been taken to investigate and to assert legal rights, and when. The starting point is likely to be the opinion of the court in Adams v Thorntons and Others, 2004, to consider what “steps a person of ordinary prudence would have taken if placed in the circumstances in which the pursuer found himself”. The facts and circumstances of each individual case are likely to be determinative.
All roads lead back to Morrison
In Morrison v ICL Plastics, 2014, the UK Supreme Court departed from the approach to the discoverability test which had been followed by the courts and practitioners for at least 30 years, although with two robust, dissenting judgements from Lord Hodge and Lord Toulson. The changed approach has caused uncertainty and perceived unfairness in some cases since then. An example is Midlothian Council v Blyth & Blyth, 2019, where the prescriptive period was held to have started when the pursuer commenced a construction project based upon defective design, even though it did not know the design to be defective.
The amendment to section 11(3) by the 2018 Act, effective from 1 June 2022, will mean that the pursuer must have knowledge of the cause of the loss and the identity of who caused it, before the prescriptive period will begin to run.
Take home points
- Legal time-bar in Scotland (Prescription) in respect of latent damages claims, will, from 1 June 2022, operate under a new regime, which is clearer and arguably fairer to pursuers. It is also closer to the position under English law.
- The changes are directed at latent damages (e.g. latent defects) claims, which are by their nature hidden for a time. The prescriptive period will not begin to run for such claims until the pursuer is aware of loss due to the act and omission of another and the identity of that person or party.
- Parties with potential claims should act on these as soon as possible to avoid them becoming barred by prescription.