Defective Cladding, Collateral Warranties and Prescription - Time Limits under the 1973 Act

The Outer House has recently delivered its decision on Leonardo Hotel Management (UK) Ltd v Galliford Try Building 2014 Ltd [2024] CSOH 43. The case is concerned with defective cladding, collateral warranties and prescription under the Prescription and Limitation (Scotland) Act 1973 (the "1973 Act"). The 1973 Act outlines the time limits which claims can be brought against others.

This blog considers the implication of this judgment on the interpretation of the 1973 Act.

Background:

This matter concerned alleged cladding defects in the Leonardo Inn Hotel in Union Square, Aberdeen:

• The first defender, Galliford Try Building 2014 Ltd ("Galliford Try"), were the design and build contractors and the second defender, Building Design Partnership Limited, the architect. Both were employed by the owner/landlord of the property.
• Galliford Try and the architect granted collateral warranties in favour of the Pursuer in July 2008. The warranties confirmed that they had complied with their respective contracts.
• Practical Completion was certified on 18 February 2009 ("PC").
• The pursuer, Leonardo Hotel Management ("Leonardo"), entered into a lease with the employer/landlord on 8 December 2009. The lease contained a clause obliging Leonardo to maintain the property free of defects.
• The employer/landlord surveyed the property on 18 September 2017 after Grenfell. They presented the results to Leonardo on 16 September 2020.
• Leonardo alleged that the hotel's cladding system was defective and sought the costs of repair. The court action was raised in February 2021.

The defenders defended the court action on the grounds that the action was time barred in circumstances where:

1. Leonardo's claim originated from a breach of the collateral warranty, and, in Scotland, these claims must be brought within 5-years from the date the loss happens.
2. The loss, in this case, occurred when Leonardo entered the lease in 2009.
3. The action was raised 12 years after the loss, significantly surpassing the 5-year period.

The case proceeded to a legal debate on these defences before Lord Richardson who agreed with the defenders that the loss occurred in 2009 and that, therefore, the claim had on its face prescribed.

Nonetheless, he decided that the action could proceed to an evidential hearing where it would be for Leonardo to prove that their claims fit within one of the saving provisions of the 1973 Act. To fit within these saving provisions, Leonardo must prove either that (a) they were not aware or could not with reasonable diligence have been aware of the defects (section 11(3) of the 1973 Act) or (b) the defenders' words or conduct induced them to believe that there were no defects (section 6(4) of the 1973 Act).

Leonardo was able to satisfy the court as to the legal basis of its claims in both (a) and (b). Lord Richardson held that:

• In order to be aware of the defects, Leonardo would need to know (actually or constructively) the objective facts of their loss. The objective facts, in these circumstances, were that (i) Leonardo was entering a lease in which they had repairing responsibilities (ii) the property was defective. Only (i) applied.
• The collateral warranties granted by the defenders contained statements inducing Leonardo to believe that the property was free of defects. The defenders also tried to argue that the collateral warranties pre-dated PC and therefore, any defects arising after July 2008 would not be covered by them. Lord Richardson rejected this point stating that Leonardo was entitled to rely on the undertakings made in the warranties in relation to the work they had already done and were yet to do to.

Implications

The guidance provided in Leonardo is helpful and highlights how the operation of the saving provisions under the 1973 Act are fact sensitive and, additionally, the law in this area is still developing. It should also be noted that new legislation came into force on 1 June 2022 which regulates the operation of prescription. Guidance on the operation of the new legislation is awaited from the courts.

This case will proceed to an evidential hearing, and we will continue to monitor and report the impact its decision will have on the future interpretation of the 1973 Act.