Construction contracts and the changes to time bar in Scotland

On 1 June 2022, two important changes came into force in Scotland which change the law around when claims might expire under a construction contract.

The basic start point in Scotland is still the same – if a claim under a construction contract has not been raised, within five years of loss, injury or damage occurring then (unless you can bring yourself within one of the limited exceptions) the claim is extinguished, regardless of liability. This being different to the six-year limitation period in England.

From 1 June, however there is now:

• A new "knowledge test" which a party bringing the claim can try and rely on to delay when the five-year time bar clock starts; and
• The ability to enter into an agreement 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 time bar clock was starting a lot 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 all that was previously required. Instead, under the new test the time bar clock will only start when the party bringing the claim first became, or could with reasonable diligence have become, aware:

(a) that the loss, injury or damage has occurred,

(b) that that loss, injury or damage was caused by a person's act or omission, and

(c) the identity of that person.

The time bar clock will not start until the party bringing the claim knew or ought to know all three facts.

Whilst the hope is that this will address the difficulties caused by the recent line of cases on time bar, a lot will depend on how the Court applies the new test and there remains a risk that it still leaves the door open for the Court to say that a claim time barred a lot earlier than a party might reasonably have thought.

It is also not clear what extra benefit the second and third part of the test brings 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 of the project. In a traditional contract set up, there may be more leeway as it may not be immediately 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 means again, much will depend on how the Courts approach this new test and what level of knowledge is said to be required to start the clock.

Extending the five-year period

While parties in England have used standstill agreements for many years, there was previously no equivalent in Scotland. That has now changed – but the position in Scotland is not the same as in England.

Unlike in England the time bar clock in Scotland is not paused; instead, parties are restricted to agreeing a one-year extension. Importantly, however, that extension can only be agreed after the time bar 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 trying to determine when the clock started and so when it will finish. The risk being that, if the time bar clock started earlier than originally thought, the parties might inadvertently extend the period by more than a year, risking the agreement being invalid and/or leaving the defender facing a claim they otherwise might have been able to avoid.

To get around this, parties may simply agree to apply a six rather than a five-year clock to the obligation without identifying specific dates, but that will still leave uncertainty around the start date (and therefore end date) meaning a claim may still need to be raised to protect the position.

All of this means that, practically speaking, until an industry consensus is reached, it is going to be very difficult to agree the terms of any extension.

Impact of these changes on subcontracts

Main contractors will also need to think about how these changes could impact the position down the line, as a different time bar clock could now apply to any pass-through claim they have against a sub-contractor or consultant.

This is because the date of a main contractor's awareness of the three 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 or change the date which applies to them – 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.

Practical takeaways

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 many claims. The key takeaways from what we have discussed being:

• Be aware that claims under construction contracts may now time bar later, under the new knowledge test, but there is a risk that, even with this new test, the Court may say the claim time barred a lot earlier than a party might reasonably have thought.
• Be aware it is now possible to agree to contractually extend the five-year time limit by a year, but be cautious when doing so and always consider how it may impact claims down the line.