Practical completion is “easier to recognise than define” said Coulson LJ, agreeing with Keating on Construction Contracts in his judgment in the 2019 Court of Appeal case Mears Ltd v Costplan Services (South East) Ltd and others. Those words will ring true with the many real estate and construction professionals working throughout the country.
Practical completion is the single most important milestone in a construction project. It can act as a trigger for the event that underpins the commercial purpose of a contract such as the sale of a property or the commencement of rent payments. There are significant legal implications of practical completion being certified including the release of retention, ceasing liability for delay damages, the assumption of risk and insurance obligations for the works by the employer and the start of the defects rectification period.
In that context, the nuances of practical completion can have a significant impact on one or more parties to a contract. The Mears v Costplan case is one such example, where a dispute over minimum room size tolerances for student accommodation came to the Court of Appeal. It was accepted that several rooms were not within the agreed tolerance and that a breach of contract had occurred. The issue was whether that breach was substantial and material, preventing practical completion from being certified and allowing Mears to walk away from its obligation to take a lease.
The court held that although the parties had agreed that a failure to build to the tolerances was “material”, the wording used was not enough to establish that a “material breach” had occurred. Practical completion could be certified, and Mears would be compelled to take the lease. A damages claim for the accepted breach of contract would be Mears’ likely remedy.
The judgment also added to the body of case law used to interpret the meaning of practical completion. Firstly, it confirmed that at practical completion the works must be free from patent defects (defects that are apparent) except to the extent that they are “trifling”. The meaning of “trifling” is also open to interpretation, being fact-based and linked to the ability to take possession of the works for the intended purpose. Coulson LJ backed away from accepted precedent to some degree, indicating that the possibility of the works being used for their intended purpose is not evidence on its own that practical completion has occurred.
It was further confirmed that there is no direct link between the certification of practical completion and whether the defective or outstanding work is remediable. Just because a defect cannot be remedied (as it couldn’t be in the Mears case) it does not mean that practical completion is prevented. Likewise, just because a defect can be remedied, it does not mean that practical completion should be certified before the remediation occurs. This supported the judge in Ruxley Electronics v Forsyth, who had said “the issue as to whether or not [a defect] is capable of economic repair is a matter that goes to the proper measure of loss, not to practical completion.”
The common law concerning practical completion is nuanced and highly sensitive to the facts in any given case. That begs the question, how can parties to a construction contract bring further clarity through drafting? It is rare for standard form contracts to define PC. The JCT Major Project does require for PC:
- Compliance with Statutory Requirements, necessary consents and approvals.
- No minor outstanding works would affect use.
- Any stipulations identified for practical completion have been satisfied.
- Health and safety file and other information has been provided”
To an extent, this drafting supports the common law developed by and summarised in Mears v Costplan. The most important feature is the requirement to comply with stipulations for practical completion stated in the contract and this represents the best method for the parties to clarify their intentions. This provision provides an opportunity for the parties to document what must happen before practical completion. Had the agreement for lease in Mears v Costplan stated that practical completion could not be certified if room sizes fell below agreed tolerance levels, then it is likely that there would have been a different outcome and Mears would have terminated the agreement without taking a lease.
Employers should consider carefully what they will and will not accept at practical completion. Particularly important in energy and infrastructure projects, are there key performance standards or outputs that must be reached? Is the physical appearance of the works critical, for example in the branding of a high- profile commercial headquarters? Are there specific layout requirements (as in Mears v Costplan) that are central to the commercial requirements of the employer in procuring the works? A failure to identify these features leaves the employer at risk that practical completion will be certified and a claim for damages is their only remedy.
This approach is not flawless. If an employer lists the key requirements for practical completion, a court may use this as evidence that any other features of the works are less important and that non-compliance with those requirements is not a bar to practical completion.
It is clear from Mears v Costplan that consistency between contractual terms is essential. Many construction projects have varying layers of contracts, with a common structure being:
- End user or purchaser enters into an agreement for lease or agreement for sale and development with a developer.
- Developer engages a design and build contractor to build the works.
- The design and build contractor sub-contracts certain works packages to third parties.
The parties may try to link practical completion for the purposes of all contracts. The developer may insist on terms in the agreement for lease that its own agent certifies practical completion under both the agreement for lease and the design and build contract. Although this is a common approach, the end user or purchaser must exercise caution to ensure that it is not inadvertently bound by looser requirements for practical completion under the building contract. The end user/purchaser should also avoid being reliant on the notification of the agreement for lease as a “third party agreement” for the purposes of the building contract. Although such a mechanism can be helpful to tie the design and build contractor to the end user/purchaser’s requirements, Mears v Costplan is evidence that this approach can create uncertainty.
The practical completion case law does demonstrate that employers must account fully for their construction requirements in their documents, both from a legal and technical perspective and should not rely on generic drafting or specifications. Getting the drafting right could save a trip to the Court of Appeal.
Stuart Wilson is a Partner specialising in construction contracts.
Dan Hall is a Partner specialising in construction disputes.
5 February 2020
This Legal Update is published as a general guide only and it is not intended to contain definitive legal or professional advice, which should be obtained as appropriate in relation to any particular matter. This publication relates to matters prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.