For all practical purposes

Laing O’Rourke Construction vs Healthcare Support (Newcastle) and Newcastle upon Tyne NHS Hospitals Trust reminds us of the tests an independent tester should apply before certifying practical completion and the importance of setting out in contract the extent to which strict observance of the specification is necessary.

An independent tester (or independent certifier) is responsible under a PFI project agreement for inspecting and signing off works. It’s a critical role and one for which it must act impartially. In a typical PFI structure, payments will not flow until the facility is ready for use.

The first defendant was engaged to procure facilities at two hospitals by the second defendant, an NHS Foundation Trust. It sub-let the design and construction of the works, divided into nine phases, to the claimant. The dispute centred on Phase 8: two new blocks of staff offices.

Laing believed that this phase was complete by mid-2012. But the NHS trust contended that five parts of the accommodation were unsatisfactory. These included daylight levels, window restrictors, steelwork and room temperatures. Consequently, the independent tester decided that practical completion had not been reached. Laing disagreed and sought declarations from the Technology and Construction Court as to how the consultant should conduct its inspection and certification duties.

It was held to be unwarranted to withhold practical completion for minor or technical defects

In common with other completion disputes, the verdict turned on the wording of the contract or, in this case, contracts. As with other PFI projects, the independent tester’s certification under the project agreement would in turn trigger practical completion under the back-to-back design and build subcontract sitting beneath.

The second defendant called for a “wider construction” of the independent tester’s obligations. Such interpretation would permit practical completion to be withheld for any breach of contract concerning the quality or conformity of the works.

The first part of clause 22.5 of the project agreement compelled the co-defendants to procure that: “… the independent tester shall, when he is satisfied, subject to clause 22A.3.4 that completion of a phase has occurred in accordance with the completion criteria, issue a phase certificate of practical completion to that effect … The issue of a phase certificate of practical completion shall, in the absence of manifest error, bad faith or fraud, be conclusive evidence for the purpose of ascertaining the relevant payment commencement date…”

The claimant relied on this to argue for a “narrower construction”. This would restrict the professional’s scope to establishing if the completion criteria had been met. It would also introduce the ingredient of fact and degree, requiring the independent tester to exercise professional judgment to establish whether the works were fit for use and occupation in line with their intended purpose.

Aspects of clause 22.5 were persuasive to the court. It provided that practical completion would not serve as conclusive evidence that the phase satisfied its specification nor diminish the project company’s liability for defects. Furthermore, the provision gave latitude for the independent tester to deal with minor discrepancies through snagging lists. It was therefore unwarranted to withhold practical completion for minor or technical defects.

But there was additionally, as Mr Justice Edwards-Stuart put it, the subject of “business efficacy and commercial common sense” to consider. The judge likened the wider construction approach to one of zero tolerance where even a non-material breach of specification could disallow practical completion. While in the example of a renal osmosis room, it might be rational for the independent tester to take an uncompromising view, this would be less defensible where the point related to a small error in the height of a suspended ceiling with no bearing on aesthetics or function. As a result, the judge concluded that the independent tester should assess the question of practical completion on the basis of the narrower construction.

From an employer’s perspective, the case underscores the need to specify key areas where any deviation from the specification will not be tolerated rather than simply demanding blanket compliance regardless of the magnitude, a stance the court was clearly uncomfortable with.

Francis Ho is head of construction at Olswang