Practical Completion: At last, some guidance from the Court of Appeal

In the recent case of Mears Ltd v Costplan Services (South East) Ltd , Plymouth (Notte Street) Limited and J.R. Pickstock Limited [2019] EWCA Civ 502, the Court of Appeal (CA) has provided  probably the most authoritative statement on what constitutes practical completion for over 50 years.

What is the purpose of “Practical Completion”?

“Practical completion” in the context of construction is of course generally understood as being the stage that physical construction works on a project are complete.  This will generally mark the point where liquidated damages can no longer be claimed for any delay to the works and when generally the risk of any damage to the works tends to pass from the contractor to the employer.  Practical completion is also significant in that it can trigger certain payments such as the release of retention  and the commencement of the final account process.  

Practical completion can also of course have implications for parties who are outside the building contract; in the Mears case it was the trigger for a potential lessee under an Agreement for Lease (“AFL”) to enter into that lease.   Practical completion is often very fact dependent and requires assessment on a case-by-case basis. Some new judicial guidance on the relevant factors is therefore useful and overdue.

What happened in this case?                              

Plymouth (Notte Street) Limited (“PNSL“)  engaged J.R. Pickstock Limited (“Pickstock“), to design and build two blocks of student accommodation in Plymouth, under an amended JCT Design and Build 2011 form (“the Building Contract”).  .

Mears Limited (“Mears“), whose activities include the management of student accommodation, entered into an AFL with PNSL with the intention that Mears would take a lease of the accommodation after practical completion. 

The AFL provided that PNSL would undertake the Landlord’s Works set out in the Building Documents, which included the Employer’s Requirements under the building contract.  Clause 6.2.provided:

“6.2. The Landlord shall not make any variations to the Landlord’s Works or Building Documents  which:

6.2.1.    materially affect the size (and a reduction of more than 3% of the size of any distinct area shown upon the Building Documents shall be deemed material), layout or appearance of the Property; or

6.2.2.    result in materially increased maintenance costs or increase the frequency of component replacement cycles; or

6.2.3.    are substantial or material.”

In the AFL, “Certificate of Practical Completion” was defined as “A certificate issued by the Employer’s Agent to the effect that practical completion of the Landlord’s Works has been achieved in accordance with the Building Contract”.  Furthermore, clause 14 provided that “The Landlord shall use reasonable endeavours to procure that the Employer’s Agent does not issue a Certificate of Practical Completion without previously giving [Mears] not less than 5 working days’ notice that he proposes to carry out an inspection on a date specified in the notice with a view to issuing the Certificate of Practical Completion”, but also, crucially, that.  “…the issue or non-issue of the Certificate of Practical Completion is to be in the sole professional discretion of the Employer’s Agent”.  In the usual way, AFL clauses 3 and 22.1 provided that 5 days after the certification of practical completion, PSNL would grant to Mears, and Mears would execute, a lease in the terms annexed to the AFL.

As matters transpired, 56 (out of 348) of the rooms were more than 3% smaller than shown on the original drawings.  This defect could not be remedied by PNSL, unless it were to demolish and rebuild the accommodation.

Mears claimed that any breach of the 3% size threshold would amount to a “material and substantial breach” of the AFL, which would mean that (a) Mears could terminate the AFL; and (b) Costplan Services (South East) Ltd,  the Employer’s Agent retained by PNSL (“Costplan“) would not be able to validly certify that practical completion had occurred.

Costplan notified Mears that they planned to visit the site for a pre-completion inspection, with the intention of certifying practical completion. Mears obtained an injunction to prevent Costplan certifying practical completion, pending the substantive dispute being resolved in the TCC.

Whilst Costplan accepted the fact that, under clause 6.2.1, a 3% reduction in room size was deemed to be a “material” variation so as to amount to a breach of contract,it argued that this did not of itself mean that the breach would be “material”so as to prevent practical completion from being certified.

What did the TCC decide?

Waksman J in the TCC disagreed with Mears and discharged the injunction. In a reserved judgment handed down on 7 December 2018  he distinguished “a material variation” from a “material breach”. The learned judge commented as follows:

“30. The deeming provision in Clause 6.2.1 is not surprising. It avoids, in one important area of the works, a dispute as to what deviation should be regarded as “material”. And it ties the areas down to those shown in the Building Documents. Materiality, therefore, whether deemed by Clause 6.2.1 or otherwise, goes to the extent of the variation which has occurred. Unless material “or substantial” any such variation does not amount to a breach. But if it does, 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.

31. Accordingly, the fact that there is a material variation for the purposes of Clause 6.2.1 does not mean without more that the resulting breach is itself material or substantial. In contending that it does, it seems to me that Mears is eliding these two quite different concepts: (a) the scale of the variation and (b) the scale of any resultant breach.”

Waksman J also observed that it would be “commercially absurd” if any breach of the 3% threshold could entitle Mears to terminate the AFL and render practical completion impossible. Furthermore, he rejected Mears’ argument that practical completion was impossible because the defects could not be remedied.

5 days after Waksman J’s judgment, Costplan issued its certificate of practical completion. Mears appealed Waksman J’s decision not to maintain the injunction that was preventing practical completion.

What did the Court of Appeal decide?

The CA agreed with Costplan’s interpretation of clause 6.2.1finding that this breach of contract would not of itself be “material”, and  upholding Waksman J’s earlier decision.   Delivering the leading judgment Coulson LJ (the most senior construction judge in England and Wales) stated at paragraph 38 of his judgment that, “…it would be commercially unworkable if every departure from the contract drawings, regardless of the reason for, and the nature and extent of, the non-compliance, had to be regarded as a breach of contract”.  The CA could not accept the prospect of even trivial breaches being deemed material so as to enable termination by Mears.   Coulson LJ went on to observe that:

“41.      …the parties were not saying that the resulting breach of contract was itself “material”. The words of clause 6.2.1 do not say that. Materiality is introduced only in relation to room size (“materially affect the size”), and not in relation to the resulting breach. There is nothing in clause 6.2.1 which addresses the character or quality of the breach. The clause simply provides a mechanism by which a breach of contract can be indisputably identified.

Coulson LJ commented that to suggest (as Mears were doing) that one trivial failure would amount to a material breach would create a “very uncommercial result” and to use the words of Counsel represented an “absolutist argument”. He went on to say that clear words would be necessary for such a draconian result and said that there were no such words in clause 6.2.1.

It is worth noting that Coulson LJ did add, however, that it is possible for parties to agree controls on how a certifier may exercise their discretion in certifying practical completion.

What constitutes Practical Completion?

The wider significance of the CA decision lies in Coulson LJ’s summary of “the law on practical completion” where he set out some relevant principles at paragraph 74 of his judgment:

1. “Practical completion is easier to recognise than define… There are no hard and fast rules“[1];
2. “The existence of latent defects cannot prevent practical completion… In many ways that is self-evident: if the defect is latent, nobody knows about it and it cannot therefore prevent the certifier from concluding that practical completion has been achieved“[2];
3. “In relation to patent defects, the cases show that there is no difference between an item of work that has yet to be completed (i.e. an outstanding item) and an item of defective work which requires to be remedied. Snagging lists can and will usually identify both types of item without distinction“;
4. Practical completion will not be prevented, “[where] the works have been completed free from patent defects, other than ones to be ignored as trifling“[3]
5. “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’ [as held in Jarvis]…. However, this should not be elevated into the proposition that if, say, a house is capable of being inhabited, or a hotel opened for business, the works must be regarded as practically complete, regardless of the nature and extent of the items of work which remain to be completed/remedied… In consequence, I do not consider that paragraph [187] of the judgment in Bovis Lend Lease, with its emphasis on the employer’s ability to take possession, should be regarded (without more) as an accurate statement of the law on practical completion “[4]; and
6. “Other than Ruxley, there is no authority which addresses the interplay between the concept of completion and the irremediable nature of any outstanding item of work.  And even Ruxley is of limited use… [and] does not support the proposition that the mere fact that the defect was irremediable meant that the works were not practically complete“[5].

In this case, because there were no contractual controls on what practical completion must look like,  it was a matter for Costplan to exercise its discretion in determining whether or not the breach of contract was “trifling or otherwise” in deciding whether to certify practical completion.  Coulson LJ added that the ability of the accommodation to be used for its purpose did not, by itself, mean that practical completion had occurred.

In addition, the fact that a defect could not be economically remedied is irrelevant; it simply depends on whether that defect was “trifling“.

What does this mean for your business?

Despite noting that there is no hard and fast rule for determining practical completion, this decision demonstrates that practical completion may be prevented by the presence of patent defects (not latent defects) which are more than “trifling“. 

This will require consideration by the certifier of the manner in which the contractor has achieved what it was contractually engaged to achieve and the actual  purposes of the building or works.  This should include consideration of the fact and degree of any defects but should ignore whether or not those defects can be economically remedied.  The ability to remedy a defect will however still be a relevant consideration when measuring loss suffered by the Employer.

When drafting building contracts, care should be taken where practical completion is concerned to make clear the parties’ intentions relating to defects (including unauthorised variations) .  This, often, will depend on the nature of the building or works in question.  A clear and traceable line of drafting from the identification of a defect through to a prohibition on the achievement of practical completion will be necessary to create “condition precedent” to the certification of practical completion. Any documents required, such as collateral warranties, building control certificates and the provision of as-built drawings and Operation and Maintenance manuals can also be added as pre-conditions for the achievement of practical completion.  The definition and mechanics of “practical completion” will have significant consequences so expert legal advice should be obtained. 

Prospective lessees often scrutinise the specification for the buildings they intend to occupy, and may even have the opportunity to be involved in its preparation.  They also routinely insist on collateral warranties from the builder and the professional team.  These documents are often appended to the AFL. However, the same level of care is not always taken when considering the terms of the building contract itself, despite the fact that practical completion is typically the trigger (amongst other things) for entry into the lease itself.  Following the decision in Mears, prospective lessees who wish to have the opportunity to reject premises because they are not constructed in accordance with the specification must take care to ensure that the AFL specifies not only what is a material breach, but also that such breaches will excuse it from entering into the lease.  This should in turn compel the employer/lessor to ensure that conditions for practical completion are more tightly defined in the building contract. 

If you require advice in relation to issues in connection with practical completion, or indeed any construction related query, please contact chris.hoar@michelmores.com or neil.mason@michelmores.com or any other member of the Construction and Engineering Team.