June 26, 2019

The elephant in the (marginally smaller) room

Members of the judiciary have in the past likened defining esoteric legal concepts to ‘describing an elephant to a blind man’ (as per the old Indian folk tale) – difficult to describe to someone who’s never seen one before, but you know one when you see it.

Practical completion is a bit like that; as Coulson LJ remarked in the recent case of Mears, “practical completion is easier to recognise than define”. In Mears, the Court of Appeal was asked to consider whether or not practical completion had occurred on a development of student accommodation.

The contractor and third respondent, JR Pickstock Limited, was engaged to build two blocks of student accommodation in Plymouth. Mears, the appellant, entered an agreement for lease (“AFL”) with the employer, PNSL, to take a long lease of the property following completion.

Under the terms of the AFL, the employer would carry out the Landlord’s Works (which incorporated the Employer’s Requirements) and 5 days after practical completion, the employer would grant Mears a lease in the terms appended to the AFL.

The AFL provided Mears with protection against unauthorised or substantial changes to the Landlord’s Works; the AFL provided that the employer may not make any variations to the Landlord’s Works which materially affect the size of the resultant property; any reduction of more than 3% was considered ‘material’.

The works commenced in mid-2016. Although the estimated date for completion under the AFL was August 2017, work continued well into 2018. On 4 May 2018 Mears served a defects notice under the AFL which alleged that 40 of the rooms had been constructed more than 3% smaller than required. Mears contended that this constituted a “material and substantial breach” of the AFL which entitled it to determine the AFL, and that as a result practical completion could not validly be certified by the employer’s agent.

In August 2018 Mears sought an injunction to restrain the certification of practical completion. Pickstock sought to discharge it, but it was upheld until hearing of the substantive issues in November 2018.

Judgment was handed down on 7 December 2018; Waksman J granted Mears’ declaration that one or more rooms in the property had been constructed in breach of the AFL, but declined to grant the other declarations that Mears sought.

Waksman J stated at first instance “there may be in theory a breach of [the AFL] which, while not “de minimis”, can be put right. A room which is too small might be capable of being put right in some cases, and in any event [the AFL] concerns material variations other than simply with regard to room size.

Coulson LJ characterised Mears’ position on appeal as being that the construction of any room outside the 3% tolerance (regardless of the nature and extent of the non-compliance) was a material and substantial breach. Mears contended that any failure to meet the 3% tolerance permitted it to treat itself as discharged from their obligations under the AFL and/or prevented certification of practical completion. Coulson LJ rejected this; he concluded that if every departure from the contract drawings, regardless of the reason for, and nature and extent of, the non-compliance, the result would be commercially unworkable.

Mears also sought declarations to the effect that practical completion could not be certified whilst there are known material or substantial defects. At first instance Waksman J stated that “the works need not be in every respect in complete conformity with the contract in order to merit practical completion, provided any non-conformity is insignificant, a matter which will usually be left to the professional judgment of the certifying entity”.

He continued “there will be practical completion if to all intents and purposes the building is complete. So the intent and purpose of the building is key., When the building is intended to house people, that has led to an emphasis on it being fit for occupation by such people. That said, what amounts to being sufficient ready for occupation is highly fact-sensitive… context, therefore, is everything. …the fact that the breach alleged here is not capable of remedy on any sensible basis does not meant that it cannot prevent practical completion. But on the other hand nor doe sit mean that it will always prevent practical completion”.

Having considered the authorities, Coulson LJ concluded that “practical completion is easier to recognise than define… the existence of latent defects cannot prevent practical completion...In many ways that is self-evident… In relation to patent defects, case show 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 requires to be remedied”.

He continued “if there is a patent defect which is properly regarded as trifling then it cannot prevent the certification of practical completion, whether the defect is capable of economic remedy or not. If on the other hand the defect is properly considered to be more than trifling, then it will prevent practical completion, again, regardless of whether it is capable of remedy. In this way, the issue as to whether or not it is capable of economic repair is a matter that goes to the proper measure of loss, not to practical completion”.

It therefore appears that the correct approach is for the certifying entity to form a view as to whether or not the alleged defect is properly regarded as trifling or not.

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