Essential law: Defects, part two

Practical completion is an important milestone in a construction project, and it has significant implications under a building contract such as:

• Relieving the contractor of the risk of loss or damage to the works
• Ending the contractor’s liability for liquidated damages
• The release of retention, usually 50% at practical completion with the remainder to follow on the issue of the certificate of making good of defects
• Starting the clock on the defects liability period and the limitation period for any defect claims.

Practical completion can also trigger events in relation to the commercial purpose of the development, such as the commencement of rent payments.

What is practical completion?

At practical completion, the project is generally considered to be substantially complete, meaning that it is in a state where is can be put to its intended use. However, small or minor defects – commonly referred to as snagging items – may still be present. In other words, the works are “practically complete” but not necessarily “absolutely complete”.

In Mears Ltd vs Costplan Services (SE) Ltd, the Court of Appeal made the following observations in relation to the meaning of “practical completion”:

• Practical completion is easier to recognise than to define, and there are no hard and fast rules as to when practical completion is (or is not) achieved.
• The existence of latent defects (material defects that are not visible after a reasonable inspection) cannot prevent practical completion as they are unknown to the certifier.
• There is no difference between uncompleted items of work and an item of defective work that requires to be remedied, as snagging lists usually identify both types of item without distinction.
• The existence of patent defects generally prevents practical completion – unless they can be considered merely “trifling”.
• Whether 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”.
• The mere fact that a defect is irremediable does not mean that works are not practically complete.

When can a defect stop practical completion?

A defect would therefore prevent practical completion if it was more than trifling.

What would constitute such a trifling defect or a snagging item that would not prevent practical completion is often not defined under a building contract.

Further, the court in Mears did not seek to define what “trifling” means in the context of deciding whether a defect should stop practical completion occurring. This will therefore be a fact-sensitive question that will depend on the precise nature of the defect and the purpose of the works.

Taking as an example the Mears case, where PNSL (the developer and contractor) was engaged to design and build two blocks of student accommodation and, under an agreement for lease with PSNL, Mears was to take a long lease of the accommodation following practical completion.

The agreement for lease prohibited PNSL from making any variations to the building works which materially affected the size of the rooms. A reduction in size of more than 3% was deemed to be material. However, 56 rooms were more than 3% smaller than required.

Mears sought a declaration that any failure to meet the 3% tolerance level should prevent the employer’s agent from certifying practical completion.

However, the Court of Appeal held that the reference to a 3% tolerance determined whether there was a breach or not but did not determine whether such a breach was sufficient to prevent practical completion.

The court held that in the absence of any express contractual definition or control on what would amount to practical completion or not, it is a matter for the certifier (and ultimately for the court in the event of a dispute) to determine whether such defects are trifling such that they would not preclude practical completion. That was not a question before the court at that time.

However, the court did say that the mere fact that the property is habitable as student accommodation does not, by itself, mean that the property is practically complete.

Further, the court held that if there is a patent defect which is properly regarded as trifling, then it cannot prevent the certification of practical completion, irrespective of whether the defect is capable of economic remedy or not. Equally, if the defect is properly considered to be more than trifling, then it will prevent practical completion, regardless of whether or not it is capable of remedy.

Ultimately, the significance of a defect – whether it can stop practical completion from being achieved – is a question of fact and degree and whether or not it is trifling. However, if parties want to agree in advance that particular breaches or defects would preclude practical completion, this should be set out clearly.

Our next instalment in this series will look at whether an employer has to ask the original contractor to return to site to remedy a defect.

Jane Burrows is an associate at Charles Russell Speechlys