What is 'Practical Completion'? The Court of Appeal Finally Weighs In!

15 Apr

Introduction

Whether practical completion (PC) has been achieved on a construction project is perhaps one of the most fertile grounds for dispute and has potentially wide-reaching implications.

Despite this, the term is used by lawyers and construction professionals so frequently, and with such conviction, as to defy anyone to debate its meaning. This norm may be considered surprising in light of the fact that the term is so rarely defined in construction contracts.

After almost a five-decade delay, in Mears Ltd v Costplan Services (South East) Ltd [2019] EWCA CIv 502, the English Court of Appeal has recently re-considered and clarified the meaning of PC.

The Facts

The case concerned the construction of student accommodation in Plymouth. The contractor was engaged by the landlord (PSNL) under an amended JCT Design and Build Contract 2011. Costplan was appointed as the Employer’s Agent. The proposed lessee, Mears, entered into an agreement for lease (“AFL”), pursuant to which the obligation to enter into a lease was linked to PC under the construction contract.

The AFL contained several protections in favour of Mears, as it was not a party to the construction contract. First, clause 6.2 of the AFL prohibited the landlord from “making any variations to the works or the building documents which…materially affect the size (and a reduction of more than 3% of any distinct area shown upon the Building Documents shall be deemed material), layout or appearance of the Property).” Second, the AFL contained a long stop provision entitling Mears to terminate the AFL if PC was not certified by 11 September 2018.

A dispute arose after Mears discovered that 56 individual rooms had been constructed smaller than provided on the planning documents. Mears alleged that this constituted a breach of clause 6.2 of the AFL, and precluded Costplan from certifying PC.

Technology and Construction Court judgment

Mears sought several declarations from the Technology and Construction Court, including that:

Pursuant to clause 6.2 of the AFL or an implied term, any failure to construct one or more of the rooms more than 3% smaller than the room sizes specified in the planning drawings was a material or substantial variation/defect in the work and/or a material or substantial breach of the AFL, thereby precluding PC.
Costplan could not certify PC whilst there were either: (i) known material or substantial defects; or (ii) subsisting material or substantial breaches of the AFL.

Waksman J determined the application on a final basis in December 2018. Despite it not being contested that 56 rooms had been constructed too small, the judge rejected Mears’s argument that every breach of clause 6.2 necessarily constituted a material breach of the AFL. The judge found that “the fact that there has been a material variation says nothing about the extent or importance of that breach to the Property or works as a whole”, and that such an interpretation would potentially lead to the “commercially absurd” situation where one material deviation in respect of one room would entitle Mears to terminate.

Although this finding effectively disposed of the entire application, Waksman J proceeded to consider Mears’s other argument. As neither the building contract nor the AFL defined “practical completion”, the judge therefore adopted the principles in Keating on Construction Contracts (9th Edition) as follows:

the Works can be practically complete notwithstanding that there are latent defects;
the Certificate of Practical Completion may not be issued if there are patent defects. The Defects Liability Period is provided in order to enable defects not apparent at the date of Practical Completion to be remedied.
Practical Completion means the completion of all the construction work that has to be done; and
the Architect/Contract Administrator has a discretion … To certify Practical Completion where there are very minor items of work left incomplete on “de minimis” principles.”

Waksman J added the following principles of his own, to the analysis from Keating:

”it is plain that practical completion is not merely about the extent of the work done but also, at least in some respects, its quality.” [77];
“the works need not be in every respect in complete conformity with the contract in order to merit practical completion, provided that any non-conformity is insignificant, a matter which will usually be left to the professional judgment of the certifying entity.” [77];
“there will be practical completion if to all intents and purposes the building is complete. So the intent and purposes of the building is key.” [76];
whether a building is “fit for occupation” is a highly fact-sensitive question that cannot be determined in a vacuum [80]; and
“simply because a building is intended to house people that is not to say that breaches that do not affect the building’s ability to house people cannot prevent practical completion” [81].

Ultimately, it was not necessary for Waksman J to apply those principles to this case as Mears sought the declarations purely on the theoretical basis, relying merely on interpretation of the AFL. That is, it did not ask the court to determine on a factual basis (albeit, unsuccessfully attempting to introduce the argument at a late stage) whether the particular defects were so material and substantial so as to prevent PC from being achieved.

Court of Appeal judgment

Mears appealed Waksman J’s refusal to grant the declarations sought. The Court of Appeal agreed with Waksman J that, by clause 6.2, the parties were dealing with the question of materiality of a reduction in room size for the purposes of determining whether such reduction constituted a breach of contract – not the question of whether such a breach was material.

Again, while this was sufficient to dismiss the appeal, the Court of Appeal went on to consider the principles to be applied in determining whether PC has been reached.

The Court set out the following principles, which were broadly consistent with (but narrower than) Waksman J:

PC is easier to recognise than define – as recognised in Keating. There are no hard and fast rules.
The existence of latent defects (by their very nature) cannot prevent practical completion.
There is no distinction to be drawn between defects and omissions.
Not all patent defects prevent practical completion – only those that cannot be regarded as trifling.
Whether or not an item is trifling is a matter of fact and degree, to be measured against “the purpose of allowing the employers to take possession of the works and to use them as intended”. However, that does not mean that the mere fact that the building is capable of being used for its intended purpose, the works must be regarded as practically complete. Regard must be had to the nature and extent of the items of work which remain to be completed/remedied.
Whether a defect is irremediable or incapable of being remedied economically, is irrelevant.

Commentary

While much of the Court of Appeal’s analysis in this case is fact-specific to the AFL, the Court of Appeal judgment is a welcome clarification of the principles that will be applied to the question of whether PC has been reached.

The Court of Appeal judgment in Mears confirms certain well-established principles, but also highlights that:

In the absence of a contractual definition of PC (as is the case under JCT standard forms), the term will be construed in accordance with the principles set out in the decided cases. The Court will be reluctant to look behind the plain wording of the contract and those general principles, to draw its own conclusions on commerciality.
Drafters of construction contracts and related contracts (such as agreements for lease) should turn their minds to whether any failure to meet such requirements is intended to preclude certification of PC and/or entitle a party to terminate the agreement, and if so, include express provision to that effect. In this regard, drafts should specifically consider any design/functional elements that are unique, or of greater importance, to the particular building and its intended use.
Developers/landlords should carefully consider whether their rights and obligations under ancillary agreements such as agreements for lease, are consistent with those under the construction contract. For example, proposed tenants may be entitled to exercise rights against the developer/landlord for which it cannot, in turn, exercise as against the contractor, either promptly or at all.

Further, the judgment lends substantial support to employers taking a more robust approach towards contractor administrators and those responsible for certifying PC, given that the Court has confirmed that the primary focus is on whether defects or omissions are “trifling”, and that the adequacy of the building for its intended use is not determinative of whether PC has been reached.