Practical completion is a familiar phrase, but just what is it and why does it matter?
Practical completion is a pivotal moment on a project and has important consequences for the employer, contractor and third parties, such as tenants and purchasers. It normally (1) stops the contractor continuing to incur liability for any liquidated damages; (2) triggers the release of a tranche of retention monies and the process to finalise sums due between the contractor and the employer; and (3) hands control of the building to the employer. It may also trigger obligations or procedures in related contracts, such as a tenant’s liability for rent or ability to fit out the property.
While it is relatively easy to identify the consequences of practical completion, identifying what needs to be done to achieve practical completion is more complex. As a leading construction text says, “practical completion is perhaps easier to recognise than to define”.
The general rule of thumb is that practical completion requires all of the construction work which needs to be done to be finished (although certifiers do have an element of discretion and can certify practical completion if there are very minor (or de minimis) works left incomplete). The fact that there may be latent defects (ie defects which are not immediately apparent and which may come to light later on) does not prevent practical completion. The position with patent defects (ie defects which are apparent when practical completion may otherwise be certified) is less clear and two decisions at first instance and on appeal in Mears Ltd v Costplan Services (South East) Ltd and others ([2018] EWHC 3363 (TCC) and [2019] EWCA Civ 502; [2019] PLSCS 60) have provided guidance on the issue.
One view is that practical completion should not be certified if there are any patent defects. However, case law indicates that practical completion can be certified where trifling patent defects have been identified. What did Mears say?
Significant patent defects
Mears involved a dispute about whether practical completion could be certified when more than 50 rooms in two student residence blocks in Plymouth had been constructed to be smaller than the size required by the agreement for lease.
Mears agreed to take a 21-year lease of both blocks at an annual rent of £1.667m. Lease completion was to occur within five working days of practical completion and, if practical completion did not occur by the long stop date, Mears could terminate the agreement and effectively walk away. There were delays but, by the summer of 2018, the works had reached a stage where the developer and the employer’s agent felt that practical completion could be certified. Mears disagreed and challenged this in the courts.
So, what did the courts decide? Practical completion was not defined in the agreement for lease, so general principles set out in previous cases were adopted as the starting point.
The judge at first instance and the Court of Appeal made it clear that practical completion will be achieved if the works only fail to conform with the contractual requirements in a way which is insignificant or “trifling”. The key question is whether or not to all intents and purposes the building is complete and fit for purpose.
For example, when a building is intended to house people, the key question is whether or not it is fit for occupation. Fitness for occupation is a highly fact-sensitive assessment and defects meaning that a family would find it uncomfortable or inconvenient to occupy a building (as opposed to something which actually physically prevented occupation) might be sufficient to prevent practical completion being achieved.
Given the lack of information about the impact the smaller room size would have, the courts did not reach a conclusion about whether practical completion had as a matter of fact been achieved in this case. However, the judge did say that the presence of a significant number of rooms smaller than the permitted size would not necessarily prevent practical completion from being certified. Neither would the fact that the defective works could not easily be remedied.
As the Court of Appeal emphasised, the important issue is whether the defective work is, as a matter of fact, “trifling”, not whether it can be easily remedied. So, if defective work is more than trifling, it is capable of preventing practical completion even if it can be remedied. The corollary is that an item which is not capable of being remedied (or remedied economically) should not prevent practical completion unless it is more than trifling. This suggests a change from the previously understood position about certifying practical completion where there are patent defects.
Mears may well, therefore, be obliged to take up the lease even though the finished product is different from that which it had bargained for. This is something which is, I believe, the subject of separate litigation.
The judge at first instance disagreed that this would mean that “… the contract-breaker simply escapes the consequences of this type of breach…” as Mears could potentially bring claims to recover any losses it suffers. For example, it might be able to bring a claim against the contractor under its collateral warranty for failing to properly complete the works; the employer’s agent under its collateral warranty for failing to comply with the terms of its appointment; and/or the landlord for breach of the agreement for lease.
This may be little comfort to Mears though. How can employers and third parties avoid being in a similar position? Practical measures are the best solution. If there are particular requirements which a project has to meet, these should be spelled out in the building contract along with the consequences of not achieving them (which was missing in Mears). Compliance, particularly during the early stages of the construction phase, should be monitored and any defective or non-compliant work brought to the contractor’s attention when, relatively speaking, rectification will be easier.
Dealing with patent defects
Not all building contracts cater for the presence of patent defects (whether trifling or more substantial) at practical completion. For example, the defect rectification provisions in the JCT traditional and design and build forms only cover defects which arise during the defects’ rectification period (usually 12 or, where housing is involved, 24 months from practical completion) but not those which are apparent at practical completion (ie before the defects rectification period starts). If practical completion is certified despite the presence of patent defects, there is no express contractual obligation on the contractor to remedy them. The JCT Major Project Form, on the other hand, defines what needs to be achieved in order for practical completion to occur and recognises that there may be “minor outstanding works” at practical completion as long as they do not affect the use of the works.
Practically, patent defects are often set out on a snagging list that is appended to the certificate of practical completion and the contractor is expected to remedy them within a reasonable time. Generally, there will not be any practical issues with that arrangement and these items will be rectified even though the building contract does not expressly deal with them. To avoid potential arguments though, the building contract should be drafted to make it clear that the defect rectification obligations will apply to defects notified in any snagging list or that defects mentioned in a snagging list will be deemed to have occurred during the defects rectification period. Either way, they will then explicitly be covered by the contractual obligations requiring the contractor to rectify those defects.
What if there are outstanding items which are more than mere snagging? Parties sometimes attempt to deal with this through conditional or qualified practical completion certificates. However, in practice, it is unlikely to be possible to undo the certification and to reinstate the retention and the ability to levy liquidated damages if the remedial works are not carried out. Therefore, the employer’s commercial leverage will be substantially reduced once the certificate has been issued. As a result, this approach should be avoided if at all possible and, if adopted, the timescale for rectification of the defects and the consequences for the contractor if they fail to meet that deadline should be clearly spelt out.
Another alternative is to employ the partial possession provisions in the contract (if any), although this will depend on the nature and extent of the outstanding works. If available, this option does have the benefit of using existing contractual provisions that specify what is to happen to the retention, liquidated damages, insurance, etc in relation to the elements of the works which are not complete.
Practical steps
Practical completion can be a tricky area with a number of competing interests that need to be accommodated. Clear drafting and effective inspection during the construction phase and at the point of practical completion can go some way to overcoming potential problems.
Doug Wass is a partner at Macfarlanes LLP
