David Nelson: A proposed overhaul of the law on negative prescription may harm business

In claiming compensation for damage to property or for breach of contract, the period for negative prescription is five years. The rationale behind this rule is that disputes should be resolved (relatively) speedily while the necessary evidence remains in existence.

In the ordinary case, this five- year period runs from the date of the loss that gives rise to the right to damages. However, there is an exception for latent damage, which has occurred but not yet become apparent. In such cases, the beginning of the prescriptive period will be postponed to the date on which the aggrieved party learns that a loss has been sustained.

At the heart of this exception is a desire to balance the interests of potential claimants, who want to ensure they have the time they need to investigate prospective claims, with the wider public, who have an interest in ensuring that the law operates as clearly and as efficiently as possible. The Scottish Law Commission has proposed a change to the exception for latent damage which changes the balance between these competing aims. The Commission’s proposal is that the prescriptive period should not begin to run until the party contemplating a claim has identified not only that they have suffered a loss, but also how the loss was caused and who is to blame. The advantage of this proposal is that it would create a situation in which no aggrieved party could lose their right to recover before becoming aware of the identity of the party responsible. However, its weakness is that it would make it exceptionally difficult to establish when the prescriptive period begins to run.

In construction disputes, for example, there are often a number of contractors, sub-contractors and design professionals who might ultimately find themselves in the firing line. Proving precisely when a prospective litigant could or should have identified the party at fault in that context will be almost impossible. In this sense, the proposal seems not so much a compromise between the competing interests of claimants and defendants as a wholesale surrender.

It is also clear that the consequences of implementing the Commission’s proposal would be more wide-ranging than a simple reversal of any restrictions in the present law.

The immediate effect of the reform would be to introduce a new element of uncertainty to the question which matters most to litigating parties: do I have a valid claim?

By favouring those wanting to pursue claims, the Commission’s proposal is likely to have an impact on insurance premiums for businesses which trade in Scotland. There is also a risk that the priority which the proposal places on permitting late claims at the expense of legal certainty and efficient dispute resolution would increase the volume of litigation and its attendant costs. At a time when the Scottish economy is facing the threat of Brexit many are asking whether this is the right time.

David Nelson is an Associate with Clyde & Co