What is the definition of practical completion?

26th Jul 2019

Our construction team are in the process of challenging a Certificate of Practical Completion which we contend, on behalf of our client contractor, was issued late. The consequences are that it increased the Liquidated Damages claim of the employer and extends the defects period.

Employment Litigation & Covenants

We say that occupation of the property was much earlier and is a major consideration. We have over the years, given many talks and dealt with many contracts and claims on this issue. Most contracts do not define the meaning of ‘practical completion’ but it is generally accepted that a building project is complete when it is capable of occupation and use, with only minor/snagging defects required to be put right. Deemed practical completion is left to the professional judgement of the architect or contract administrator.

Up until recently, the construction industry relied on Akenhead J in Walter Lilly v Mackay. He summarised the position as:

“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.”

In 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.

The dispute related to an agreement for lease 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 Agreement contained the following terms:

  • 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. By then however, 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 obtained an injunction restraining the employer’s agent from issuing the certificate until trial. Such an application for an injunction is not common, although we have advised on similar injunctions in the past.

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, preventing 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 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 as follows:-

  1. Practical completion is easier to recognise than define
  2. The existence of latent defects cannot prevent practical completion. Quite obviously they are not known.
  3. In relation to patent defects, there is no difference between an item of work which has to be completed 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 may not 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.

The latter is interesting as we have advised on, for example, surgeries and operating rooms which can be used but have had issues with decorating, additionally we advised on issues with works at a hospital where the landscape gardening had not been finished.

It is unlikely to curb the number of disputes on whether practical completion has been achieved. 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 express definition in the contract – provided such a definition is carefully thought through and worded, to avoid yet further disputes.

We deal with court litigation (High Court, County Court & TCC), including injunctive relief and applications relating to arbitral proceedings and the enforcement of Bonds.

We have extensive experience advising across a broad cross section of construction matters including issues relating to damages; defective works; drafting & advising on Contracts including JCT Collateral Warranties; extensions of time; payment provisions under the Housing Grants, Construction Regeneration Act and suspension of works.