Material breach of contract and practical completion

In 1970, Viscount Dilhorne' in the case of City of Westminster v Jarvis, said that:

“The contract does not define what is meant by ‘practically completed’. One would normally say that a task was practically completed when it was almost but not entirely finished; but ‘Practical Completion’ suggests that that is not the intended meaning and that what is meant is the completion of all the C construction work that has to be done.” 

Almost 50 years later, Lord Justice Coulson was asked to consider again the meaning of practical completion. Jesse Way takes up the story. 

Earlier this year, the Court of Appeal delivered its judgment in Mears Limited v Costplan Services (South East) Limited & Ors [2019] EWCA Civ 502 (“Mears”).  In Mears, the Court of Appeal had to determine two issues. 

The first was whether clause 6.2.1 of the agreement for lease (“AFL”) between Mears Limited (“Mears”) and Plymouth (Notte Street) Limited (“PNSL”), on its proper construction, deemed a breach of contract to be material so as to allow Mears to treat itself as discharged from its obligations under the AFL.  Clause 6.2.1 provided:

“6.2  The Landlord shall not make any variations to the Landlord’s Works or Building Documents which:

6.2.1  materially affect the size (and a reduction of more than 3% of the size of any distinct area shown upon the Building Documents shall be deemed material), layout or appearance of the Property; or…” 

The second issue was whether, on a proper construction of the AFL, practical completion could be certified when there were known material or substantial defects or breaches of contract.

Mears had appealed from the first instance decision in Mears Limited v Costplan Services (South East) Limited & Ors [2018] EWHC 3363 (TCC) in which a number of declarations sought by Mears were rejected.     

Background

Mears was a provider of student accommodation.  PNSL had engaged a builder to design and construct two blocks of student accommodation.  Under the AFL, Mears was to execute a long lease over the property within five days of the issue of a certificate of practical completion.  If a certificate of practical completion was not achieved by the relevant date, either party could terminate the AFL.  Mears’ ultimate objective was to be discharged from its obligations under the AFL.  

Prior to completion of construction, it became apparent that a number of the rooms had been constructed more than 3% smaller than as specified in the Building Documents.  Mears took issue with this and commenced proceedings.

At first instance, Mears sought five declarations.  The effect of Declarations 1–3, if granted, would have been to prevent certification of practical completion.  Declaration 4 related to the proper construction of clause 6.2.1 of the AFL and whether it meant a breach of that clause was a material or substantial breach of contract.  Declaration 5 was to the effect that there were one or more rooms in the property which had been constructed more than 3% smaller than the sizes specified.  

At first instance, Declarations 1–4 were not granted, however Declaration 5 was.  It was the refusal of the trial judge to grant Declarations 1–4 which was the subject of the appeal.  As it turned out, there were 56 rooms constructed more than 3% smaller than specified. 

The Appeal

Issue 1:  What was the proper construction of clause 6.2.1?

Mears argued that the failure to meet the 3% tolerance was a material breach and permitted it to treat itself as discharged from the obligations under the AFL.  Additionally, Mears argued that if it was wrong in its interpretation of clause 6.2.1, then PNSL would be benefitting from its own wrong (i.e. the failure to build the rooms within tolerance).  

PNSL argued that Mears’ case was based on a misinterpretation of clause 6.2.1.  PNSL accepted any failure to comply with the 3% tolerance was a breach of contract but not that it was a material or substantial breach of contract.  In response to the argument that PNSL was benefitting from its own wrong, PNSL maintained it was not relying on its breaches for any purpose (e.g. to justify termination). 

The Court held that the parties could agree that a breach of a particular clause amounted to a material or substantial breach of contract.  However, the parties did not do that in this case.  What the parties did do in clause 6.2.1 is agree that a breach of contract would occur if there was a reduction of more than 3%.  The use of the words material and materially in clause 6.2.1 were directed to the size of the rooms, not the nature of the breach.  The words of clause 6.2.1 did not support Mears’ argument that the resulting breach of contract was material.  Coulson LJ stated that if the parties were taken to have agreed that any failure to meet the 3% tolerance, no matter how trivial, amounted to a breach of contract, it would have led to an uncommercial result.  It would have meant one trivial failure to meet the 3% tolerance allowed Mears to determine the AFL.  Coulson LJ further stated that clear words would be necessary for such a draconian result and there were no such words in clause 6.2.1. 

Coulson LJ agreed with PNSL in that it could not be said that PNSL were attempting to rely on its breaches to seek any advantage or gain.  It was stated, however, that it would be a matter of factual assessment as to whether or not the breaches were material or substantial and whether they justify determination and/or should have led to a refusal of the certification of practical completion (bearing in mind there were 56 rooms constructed outside of tolerance).  

Issue 2:  Could practical completion be certified where there were known material or substantial defects or breaches of contract?

Mears argued that in certifying practical completion, the certifier was bound by clause 6.2.1 of the AFL and therefore bound to recognise that any failure to meet the 3% tolerance was a breach of contract.  Furthermore, Mears argued that the certifier had to acknowledge that such a failure was a material breach of contract.  

Alternatively, Mears argued that since the breaches (the 56 rooms out of tolerance) could not be remedied without knocking the property down and starting again, they were “irremediable” and prevented certification of practical completion. 

PNSL’s position was that practical completion was a matter of fact and degree, and it was a matter for the certifier as to whether or not the failure to achieve the 3% tolerance prevented practical completion.  As to the “irremediable” point, PNSL said it did not matter, but what did matter was whether or not the outstanding works could be regarded as trifling.  If they were trifling, practical completion could be certified.  If they were not trifling, then practical completion could not be certified.

The Court of Appeal considered the authorities relating to practical completion and summarised the law on practical completion as follows:

1. Practical completion is easier to recognise than define … There are no hard and fast rules …
2. The existence of latent defects cannot prevent practical completion … In many ways that is self-evident:  if the defect is latent, nobody knows about it and it cannot therefore prevent the certifier from concluding that practical completion has been achieved.
3. In relation to patent defects, the cases show that 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.  Snagging lists can and will usually identify both types of item without distinction.
4. Although one interpretation of Viscount Dilhorne in Jarvis and Lord Diplock in Kaye suggests that the very existence of patent defect prevents practical completion, that was emphatically not the view of Salmon LJ in Jarvis, and the practical approach developed by Judge Newey in William Press and Emson has been adopted in all the subsequent cases. As noted in Mariner, that can be summarised as a state of affairs in which the works have been completed free from patent defects, other than ones to be ignored as trifling. 
5. Whether or not an item 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' (see Salmon LJ in Jarvis).  However, this should not be elevated into the proposition that if, say, a house is capable of being 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 which remain to be completed/remedied.  Mariner is a good example of why such an approach is wrong.  In consequence, I do not consider that paragraph [187] of the judgment in Bovis Lend Lease, with its emphasis on the employer’s ability to take possession, should be regarded (without more) as an accurate statement of the law on practical completion. 
6. Other than Ruxley, there is no authority which addresses the interplay between the concept of completion and the irremediable nature of any outstanding item of work.  And even Ruxley is of limited use because that issue did not go beyond the first instance decision.  But on any view, Ruxley does not support the proposition that the mere fact that the defect was irremediable meant that the works were not practically complete.

The Court of Appeal then went on to consider the arguments raised by the parties.  As the Court rejected the contention that any failure to meet the 3% tolerance automatically amounted to a material breach of contract, the Court decided it was inappropriate to grant the declarations sought by Mears.  Furthermore, the Court held:

1. Parties can agree parameters to guide and control certifiers but they did not do that here.  
2. Whether a departure from drawings is trifling or otherwise is a matter of fact and degree.
3. In the absence of any express contractual definition or control, practical completion is, at least in the first instance, a question for the certifier.
4. The fact that the property is habitable as student accommodation does not, by itself, mean it is practically complete.  
5. The issue of whether or not a breach is remediable is irrelevant to the issue of practical completion.  If there is a defect regarded as trifling then it cannot prevent the certificate of practical completion, whether it is capable of economic remedy or not.  If the defect is more than trifling, it will prevent practical completion, regardless of whether or not it is capable of remedy. 

For these reasons, the Court of Appeal held Waksman J was right to refuse Declarations 1–3.  

Conclusion

For the reasons outlined above, the appeal was dismissed.  The decision reinforces the principle that drafting in parties’ contracts must be clear if a specific result is sought.  The summary on the law of practical completion is comprehensive and of assistance to those in the construction industry.  One of the key takeaways from the decision is that if parties intend to put parameters on certifiers, then such parameters must be stated in the agreement.  Failing that, the decision in the first instance will be a matter for the certifier. 

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