Amy Pairman: Construction contracts and the changes to time bar in Scotland
On 1 June 2022, two changes came into force in Scotland which change the law around when claims expire under a construction contract.
The general starting point is the same – if a claim has not been raised within five-years of the loss, injury or damage occurring then (unless one of the exceptions apply) the claim is extinguished.
From 1 June, however there is now:
- A new “knowledge test” which may delay when the five-year clock starts; and
- The ability to extend the five-year period by one year.
The new knowledge test
In Scotland, a number of court cases were leading to situations where the five-year clock was starting sooner than parties might have ordinarily thought.
The new knowledge test tries to address this, by requiring more than just objective knowledge of the occurrence of loss, which was what was previously needed. Instead, under the new test, the clock only starts when the party bringing the claim first became, or could with reasonable diligence have become, aware:
- that the loss, injury or damage has occurred,
- that that loss, injury or damage was caused by a person’s act or omission, and
- the identity of that person.
The clock will not start until the party bringing the claim knew or ought to know all three facts. Whilst the hope is this will address the difficulties caused by the recent cases, a lot will depend on how the court applies the new test; and there is a risk it leaves the door open for the court to say a claim time barred earlier than a party might have thought.
It is also not clear what extra benefit the new test will bring in construction cases. The party who caused the loss will usually be easily identified as one of the parties to the construction contract(s); and a defect/failure will usually be due to an act or omission in either the design or construction. In a traditional contract set up, there may be more leeway as it may not be clear whether the loss was caused by design or construction – but in a design and build contract, that is unlikely to be the case. Which again means much will depend on how the courts approach it.
While parties in England have used standstill agreements for many years, there was no equivalent in Scotland. That has now changed – but the new position in Scotland is different.
Unlike in England, the clock in Scotland is not paused; instead, parties are restricted to agreeing a one-year extension. However, that extension can only be agreed after the clock has started, but before the five-year period has ended.
In many cases this will lead to the difficult (and often contentious) question of determining when the five-years started, and so when it finishes. The risk being, if the clock started earlier than the parties thought, they might inadvertently extend the period by more than a year, risking the agreement being invalid and/or leaving the defender facing a claim they might have been able to avoid.
To get around this, parties may simply agree to apply a six rather than a five-year clock, without identifying specific dates; but that will still leave uncertainty, meaning a claim may need to be raised anyway, to protect the position.
This means that, until an industry consensus is reached, it is going to be very difficult to agree the terms of any extension.
Impact on subcontracts
Main contractors will also need to think about how these changes could impact the position down-the-line, as a different clock could apply to claims they have against a subcontractor or consultant.
This is because the date of a main contractor’s awareness of the facts under the new knowledge test, may be different to the date their employer will be said to have that knowledge in any claim against them. Likewise, any agreed extension between the main contractor and the employer, will not bind subcontractors– that would need to be negotiated separately. The risk being, main contractors could find themselves facing a claim, but being unable to pass that claim down the line.
The changes in Scotland are a step in the right direction and, based on the court’s interpretation, they could lead to later start dates for claims. The key points for now being:
- Claims under construction contracts may now time bar later, but there is still a risk that, even with the new knowledge test, the Court may say the claim time barred earlier than a party thought.
- It is now possible to agree to contractually extend the 5-year time limit by a year, but agreeing terms may be difficult and always consider how it may impact claims down the line.
Amy Pairman is an associate at Brodies LLP