The shape of an elephant?
For the first time in 50 years, the Court of Appeal has been asked to consider the meaning of practical completion in the context of a building contract.
Justine Brazil considers the judgement handed down in Mears Ltd v Costplan Services (South East) Ltd and others at the end of March which provides a useful summary of the law in this area for those working in the construction sector.
The case, on appeal from the TCC, concerned two blocks of student accommodation in Plymouth. Mears Limited (Mears) the appellant, had entered into an agreement for lease (AFL) with the second respondent Plymouth (Notte Street) Limited (PNSL). PNSL engaged J.R. Pickstock Limited (Pickstock), the third respondent to design and build the two blocks. The first respondent, Costplan was the Employer’s Agent (replacing Edmonds Shipway LLP in 2016) who was named in both the Building Contract and the AFL.
Mears was in the business of providing managed student accommodation and as the prospective tenant but not a party to the Building Contract, the AFL prohibited PNSL from making any variations to the building works which materially affected the size of the room. In particular, the relevant clause stipulated that a reduction in size of more than 3% would be deemed to be material which stated:
“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.”
PNSL was required to carry out the Landlord’s Works as set out within the Building Documents, annexed to the ASL. These included the Employer’s Requirements which were also a key component of the Building Contract. The AFL contained specific provisions setting out the requirements for practical completion of the Landlord’s Works and stated that 5 days after the certification of practical completion PSNL would grant Mears and Mears would execute a lease in the terms set out in the AFL. Further the AFL provided that the issue or non-issue of a certificate of practical completion was to be in the “sole professional discretion” of the first respondent.
The AFL defined the Certificate of Practical Completion 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.”
It was envisaged that only one certificate would be issued rather than separate certificates under both the AFL and the Building Contract.
The issue regarding practical completion arose due to the fact Mears issued defects notices under the AFL alleging that a number of the completed rooms had in fact been constructed more than 3% smaller than as required by the AFL. Notwithstanding the defects notice having been issued, Costplan indicated that it intended to issue the certificate of practical completion. In August 2018, Mears was granted an interlocutory injunction which restrained Costplan from issuing the certificate and an expedited trial of the limited issues was ordered. Mears agreed not to terminate the AFL until after the TCC’s judgement.
At trial Mears sought various declarations and in particular sought a declaration that any material or substantial variation to the building works which amounted to a breach of the clause concerning the size of the rooms would amount to a breach of the AFL. This in turn would be sufficient to prevent practical completion and would allow Mears to terminate the AFL. However, in his judgement, Waksman J disagreed with Mears’ argument that a material variation of the works was not necessarily a material breach of the AFL. In particular he stated that Mears’ interpretation of the clause “would mean that one material deviation in respect of one room (for example a bin store) would [entitle Mears to terminate]. That result seems to me to be so commercially absurd that it cannot be right.”
In addition, the Judge rejected Mears’ submission that it was possible to impose a “de minimis” test to determine what is material, stating that there was “much ground” between a de minimis breach on the one hand and a material breach on the other. Mears also put forward an argument that because the breach of contract was irremediable, i.e. the rooms could not be made larger, then it must follow that practical completion could not be certified. Again, this argument was rejected on the basis there would be other remedies available to Mears.
“a material or substantial breach of contract”
Court of Appeal Decision
Coulson LJ gave the leading judgement. He agreed with the TCC decision that Mears’ interpretation of the AFL was wrong and that, even though 56 of the completed rooms had sizes below the 3% tolerance specified in the AFL, this was not a material breach of contract that would allow Mears to determine the AFL.
Coulson LJ provided a very useful analysis of the pertinent provisions of the AFL. In particular, he explained that the materiality wording in the clause concerning the size of the rooms related to the tolerance level specified and not the consequent breach of contract stating that:
“In my view the parties to contracts of this sort are entitled to agree, in advance, that a breach of a particular clause amounted to a material or substantial breach of contract. The issue is whether or not that is what these parties did at clause 6.2.1. For the reasons set out [in the judgement], I have concluded that they did not.”
“an absolutist argument”
He went on to state that although failing to meet the 3% tolerance was a material variation of the works and that a variation of this type was a breach of contract, he did not consider that the failure was a material breach of contract and thus Mears were not entitled to terminate the AFL. In particular, he stated:
“Moreover, if the parties were to be taken to have agreed that any failure to meet the 3% tolerance no matter how trivial, amounted to a material breach of contract, it would lead to a very uncommercial result. It would mean that every room would be the subject of minute measurement and remeasurement, and that one trivial failure to meet the 3% tolerance, allowed Mears to determine the AFL. This was properly characterised by Mr Rigney as “an absolutist argument”. In my view, clear words would be necessary for such a draconian result and there are no such words in clause 6.2.1”.
The meaning of Practical Completion
Mears’ appeal was rejected by Coulson LJ based on his analysis of clause 6.2.1 and his decision that despite the fact 56 rooms fell below the 3% tolerance, this did not amount to a material or substantial breach of contract as envisioned by the AFL. However, Coulson LJ went on to deal with specific practical completion issues and provided a succinct review of the law in this area summarising as follows:
a) Practical completion is easier to recognise than define.
b) The existence of latent defects cannot prevent practical completion since nobody knows them and it cannot prevent practical completion from being achieved.
c) In relation to patent defects, 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 needs to be remedied. Snagging lists can and will usually identify both types.
d) On a review of the law regarding patent defects, practical completion can only be achieved where works have been completed free from patent defects, other than ones to be ignored as trifling.
e) It is a matter of fact and degree as to whether an item is trifling. In certain cases, it may be measured against whether or not the works could be taken over and be used as intended. In the present case, the fact that the rooms were 3% smaller than required did not prevent them being used for their intended purpose i.e. for student accommodation. However, this is not always the case and the nature and extent of items of work which remain to be completed or remedied must also be considered.
f) The mere fact that a defect is irremediable does not preclude the achievement of practically complete.
“easier to recognise than define”
Given that there is no industry accepted definition of what constitutes practical completion, this case provides a useful summary of a concept that is of utmost importance in any building contract. None of the standard form building contracts provide guidance, and in his judgement, Coulson LJ quoted Keating who states that practical completion is “easier to recognise than to define”.
Although Coulson LJ’s judgement, usefully summarises the law, it highlights the problems with contractual drafting and the issues that arise when the contracting parties’ interpretations result in very different expectations. Practical completion may be difficult to define but given the outcome of this case, if the parties to a construction contract require a particular outcome then the drafting needs to be clear. As Coulson LJ commented, the parties to a construction contract can agree that a particular clause amounts to a material and substantial breach of contract, but they did not do so here.
So just like the elephant in the parable, practical completion is easier to recognise than define.