Cornerstone - Practically complete, apart from...


16 July 2019

Over the years the term ‘practical completion’ has caused more than a few headaches. Practical completion is often the trigger for important milestones such as retention release, the rectification
period, and the end of delay damages. But despite that, most contracts do not define what ‘practical completion’ is.

Generally, it is considered the point at which a building project is complete except for minor defects that can be put right without undue interference or disturbance to an occupier. Some in the industry describe this point as when the building project is ‘capable of beneficial occupation and use’. In effect, what is deemed practical completion is left to the professional judgement of the architect or contract administrator.

Up until recently, the construction industry looked to the judgment of Akenhead J in Walter Lilly v Mackay. He summarised the position as:

“(a) Practical completion means completion for all practical purposes, and what that completion entails must depend upon the nature, scope and contractual definitions of the Works, as they may have developed by way of variation or architect’s instructions.
(b) De minimis snagging should not be a bar to practical completion unless there is so much of it that the building in question cannot be used for its intended purposes.”

The trouble is, with all the will in the world, a term such as “completion for all practical purposes” does not really add much clarity. Without a definition in a contract, and with so much riding on it, it isn’t difficult to see why so many disputes arise relating to whether or not practical completion has been achieved. However, in a recent case (Mears v. Costplan (2019)), the Court of Appeal provided welcome clarity as to how the courts should interpret the widely used but seldom defined term.

Background

The dispute related to an agreement for lease (AFL) between Mears (the Tenant), PNSL (the Landlord) and Pickstock (the Developer). Mears agreed to take a 21 year lease from PNSL of two blocks of student flats in Plymouth for an annual rental of £1,666,667 following the completion of their construction.

The AFL contained a number of key clauses that included:

  • Clause 13.7.2: if a certificate of practical completion had not been issued by 11 September 2018 (the longstop date), Mears or PNSL could give notice of termination
  • Clause 14.4: the issue or non-issue of a certificate of practical completion was to be in the “sole professional discretion” of the employer’s agent 
  • Clause 6.2.1: PNSL was prohibited from making any variations to the works which materially affected the size of the rooms. It stated that a reduction in size of more than 3% from the sizes shown in the contract drawings was deemed to be material.

The works, which started in the middle of 2016, were delayed. In late summer 2018, Mears alleged that some of the rooms in the flats were more than 3% smaller than specified. However, by then the works were complete, the rooms had been built, and the longstop date was less than a month away.

Despite the rooms being 3% smaller than designed the employer’s agent indicated that it intended to issue a certificate of practical completion. Mears not being happy with the employer’s agent sought and obtained an injunction restraining the employer’s agent from issuing the certificate until trial. Mears sought a declaration that on the proper interpretation of the AFL, a reduction in the room size exceeding 3% was itself a material variation and therefore a material breach of contract. This alone would prevent practical completion being certified.

The judge at first instance found that 56 rooms had indeed been built more than 3% smaller than specified. But he refused to grant the declaration Mears had sought. He held that Mears’ argument was wrong as a matter of construction, and “commercially absurd”.

The appeal

The Court of Appeal was in complete agreement with Waksman J in 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 preventing practical completion. In deeming a reduction in size of more than 3% as “material”, the parties were simply identifying what counted as a prohibited variation and, therefore, a breach of contract.

The court went on to provide a helpful review to the authorities on practical completion, from which he condensed the following:

  1. Practical completion is easier to recognise than define
  2. The existence of latent defects cannot prevent practical completion, since nobody knows about them
  3. In relation to patent defects, there is no difference between an item of work which has to be completed (that is, an outstanding item) and an item of defective work which requires to be remedied. Snagging lists can, and will usually, identify both
  4. The fact that a defect is irremediable does not of itself prevent practical completion
  5. That practical completion was a state of affairs in which the works have been completed “free from patent defects, other than ones to be ignored as trifling”
  6. Whether or not a defect 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, this should not be elevated into the proposition that if a house can be 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 that remain to be completed or remedied.

Conclusion

Although extremely helpful, the guidance is unlikely to curb the number of disputes on whether practical completion has been achieved. For many it feels like practical completion can easily be decided objectively but in reality, with so much riding on practical completion, it will continue to be decided subjectively. If parties think practical completion is likely to be contentious at the outset, or if it’s particularly important to one party, they should consider including an explicit definition in the contract - provided such a definition is carefully thought through and worded, to avoid yet further disputes.