Legally Bound

Jordan ... be clear in stating conditions.

Jordan ... be clear in stating conditions.

What is practical completion?

STUART JORDAN* stresses the need to define ‘practical completion’ in contracts, highlighting the importance of being clear in stating conditions and the consequences of failing to meet them, in order to prevent any disputes at the time of handover.

November 2019

Following on from last month’s piece on defects correction, this month we look at the meaning of ‘practical completion’. This term is almost ubiquitous in building contracts across the Gulf region but is rarely defined – perhaps because the parties feel that it needs no definition.

If it is defined, the traditional definition is something like:

“Completion of the Works without defects or omissions which would materially prevent or impede the beneficial use and occupation of the completed works.”

A definition like this is helpful. In marking a divide between defects which would or would not prevent practical completion, the definition correctly concentrates on the practical question of what can be done with the completed works. However, this still leaves room for disagreement about the materiality of the interference of those defects with the employer’s planned use.

So, is this type of definition the best that can be done, or can parties agree tighter definitions in order to reduce that room for disagreement?

The meaning of ‘practical completion’ (and, specifically, the issue of what constitutes a material defect) was examined recently in a dispute between an intended lessor and a developer, relating to the construction of student accommodation. The agreement for lease required the lease to be entered into within five days of practical completion of the accommodation blocks. It also set out minimum internal areas for the accommodation units and stated that any deficiency in those areas of more than three per cent would be “deemed material”.

We can guess what happened next: the intended lessor inspected the works prior to planned completion and said that many of the completed units were more than three per cent smaller than the drawings required – and that practical completion could not, therefore, be certified. They applied to court for an injunction against the certification of practical completion. Also, on the basis that the defects were, in practice, impossible to rectify, the intended lessor also applied for a declaration that they were, therefore, not required to enter into the lease.

At first sight, it might appear that the parties had agreed a tighter definition of practical completion, by introducing a benchmark that a space deficiency of more than three per cent is “material”. However, the English Court of Appeal (Mears Ltd versus Costplan Services (SE) Ltd and others) disagreed. The court made a general survey of the concept of practical completion and stated some general principles, the first of which is that practical completion “is easier to recognise than to define” and that there are “no hard and fast rules”, which isn’t a lot of help to parties trying to define it!

Other principles included:

• A patent omission in the works at completion is to be treated the same as a patent defect – both need to be assessed in terms of materiality;

• The question of materiality of defects is to be measured against “the purpose of allowing the employer to take possession of the works and to use them as intended”;

• However, this does not mean that works which are capable of some intended use must be regarded as practically complete. This is a matter of fact and degree; and

• The presence of irremediable defects does not, of itself, prevent practical completion.

I am not sure that this takes us much beyond the traditional definition set out above: the question of materiality of defects is still to be decided in terms of the employer’s ability to use the works as planned, this being a matter of degree.

The more interesting part of the judgement was on the deemed materiality of a three per cent area deficiency. Directly addressing two of the lessor’s arguments, the court held that this provision did not make the area deficiency a fundamental or substantial breach which would have allowed the lessor to terminate the contract. It also did not mean that the deficiency should automatically prevent certification of practical completion. This, I think, is simply a matter of interpreting the contract as drafted: the parties could have, but did not, expressly state that a deficiency in excess of three per cent would be grounds for termination. And they could have, but did not, define practical completion to exclude such area deficiencies.

So, what was the point of the three per cent rule? The court found that this was merely a benchmark for identifying a breach of the contract – effectively a three per cent tolerance from specification.

There is nothing to stop parties agreeing any number of benchmarks as prerequisites of practical completion. After all, engineering sector contracts set out long lists of conditions for mechanical completion and taking over. The trick, in both types of contract, is to be clear in stating those conditions and the consequences of failing to meet them.

 

* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.




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