Loretto Housing Association granted full hearing in £3m damages action against contractors

A housing association which sued contractors, engineers and architects over “serious defects” in the redevelopment of a former hospital has been granted a full hearing in its £3 million damages action.

The defenders claimed that any obligation to make reparation to the pursuer for “breach of contract” were time-barred because the action was raised in 2015 - more than five years after any losses were incurred - but the pursuer argued that it only because aware of the defects in 2013.

A judge in the Court of Session allowed a proof into the respective claims after ruling that the pursuer had pled a relevant case.

‘Serious defects’

Lord Doherty heard that the pursuer Loretto Housing Association planned to redevelop and convert the former Duke Street Hospital in Glasgow into 17 residential flats and a day centre. 

In 1997, it engaged structural engineers Cameron Ross and architects Cooper Cromar, who together designed the works to be carried out by the contractors Cruden, appointed in 1999 along with clerk of works John Arnott Associates.

The works involved the retention and refurbishment of the existing facades and roof of the four-storey building, which was built in about 1904, and the demolition and replacement of its interior.

The contractors began to carry out the contract works on site in 1999, although the pursuer and the contractors did not enter into the formal written building contract until 10 October 2000. 

On 25 October 2000, a certificate of practical completion of the contract works was issued to the contractors by the architect, and during the course of the works between 1999 and 2001, the architect issued interim valuation certificates to the contractors certifying the value of work done. 

In terms of the building contract, the pursuer was obliged to make payment of sums certified and it did so.

In about 2001, after the works had been completed, the architect issued a final certificate certifying the value of the contract work, and a certificate of making good defects was issued to the contractors by the architect on 23 May 2002.

But the pursuer claimed that in 2013 and 2014, as a result of obtaining reports on the condition of the building from another firm of engineers, it discovered that the redevelopment and refurbishment which had been carried out had been unsatisfactory and that the building had serious defects.

The building was unrestrained against lateral loads, it had a defectively installed roof, and there was physical damage to stonework caused by the movement of the external walls during and following completion of the works.

‘Breach of contract’

The pursuer blamed the engineer and the contractors for the defects, claiming that they were in “breach of contract”, and raised an action against the defenders on 3 December 2015.

The case was set down for a 16-day proof before answer which was to commence in May 2019, but in light of Lord Doherty’s decision in Midlothian Council v Raeburn Drilling and Geotechnical Limited and another [2019] CSOH 29 the defenders sought to amend their pleadings to make a further prescription argument along the same lines as the argument which had succeeded in Midlothian.

In response, the housing association and the contractor introduced averments founding upon section 6(4) of the Prescription and Limitation (Scotland) Act 1973.

In short, the position of the engineer, architect and clerk of works was that while the pursuer had not been aware of the existence of defects at the date of practical completion, it had incurred expenditure when it paid the contractors, which was wasted expenditure, and it was therefore aware of having suffered loss, injury and damage more than five years before the action was raised.

However, the pursuer submitted that Midlothian was “wrongly decided” and that it was not aware and could not with reasonable diligence have been aware more than five years before the raising of the action that it had suffered loss, injury or damage as a result of the defenders’ alleged breaches.

The pursuer denied that the relevant payments were loss caused by the engineer’s breaches of contract - the making of the payments was caused by the architect’s certification, which caused it to understand that the contractors were entitled to be paid for work which had been properly performed.

If the relevant payments were loss caused by the engineer’s breaches, the pursuer claimed that in making the payments it acted in error induced by the engineer which caused it to refrain from making a relevant claim in relation to the engineer’s obligation to make reparation, and that the error persisted until 2013/2014.

‘Suitable for inquiry’

Allowing a proof before answer, the judge held that the pursuer had pled a relevant case.

In a written opinion, Lord Doherty said: “Taking the pursuer’s averments pro veritate, is it clear from them that the pursuer suffered financial loss caused by the breach of contract of the engineer and/or the architect and/or the clerk of works when interim payments were made to the contractors by the pursuer following certification by the architect?

“If so, and on that hypothesis, are (i) the pursuer’s averments of error induced by the engineer (ii) the contractors’ averments of error induced by (a) the engineer (b) the architect (c) the clerk of works, suitable for inquiry?

“It is well established that a pursuer’s case should not be dismissed as irrelevant unless it is clear that it will fail even if it proves all that it aver… The same principle applies mutatis mutandis to a defender’s case for contribution against a third party.

“Since I have come to the view that the pursuer’s case against the engineer and the first defender’s cases against the engineer, architect and clerk of works are suitable for inquiry, I think it inappropriate prior to the facts being established to embark upon a detailed analysis of the legal position.”

However, the judge added that he was not persuaded that the Midlothian case was incorrectly decided, adding that he adhered to the reasons given for his decision.

Lord Doherty explained: “First, ex hypothesi of the pursuer’s pleadings there is a dispute as to whether the engineer’s breaches were an effective cause of the payments which the second defender and the first and second third parties maintain were damnum. The pursuer’s position is that they were not. I am not persuaded that I ought to determine, without inquiry into the facts, that the pursuer’s position on this point is obviously wrong.

“Second, if I am wrong about that, I am not convinced that the pursuer and the first defender are bound to fail to establish their section 6(4) error cases. In my opinion each of those cases is suitable for inquiry.

“The pursuer offers to prove that the engineer’s failures of inspection and supervision of the first defender’s work resulted in the architect not being advised by the engineer of the defects; which led to the certificates being issued without the benefit of that advice, and payment being made in terms thereof in circumstances where the pursuer had no reason to suppose that any of the work certified had not been properly done. It offers to prove that that remained the position until 2013/14, and that it could not with reasonable diligence have discovered the error until then.

“The first defender’s section 6(4) averments in its case against the engineer are to substantially similar effect. Its section 6(4) averments in its case against the clerk of works are very similar too, and they have the added string that the clerk of works failed to bring the relevant defects to the pursuer’s attention in her reports.

“I do not accept that I ought to conclude at this stage that any of the averments of the engineer, the architect or the clerk of works are irrelevant. In my opinion those averments are also suitable for inquiry.”

The Lord Ordinary put the case out by order to discuss further procedure, including whether the inquiry should be a preliminary proof before answer or a proof before answer on the whole dispute.

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