This is the third in our series of “Cases your profession needs to know” and the follow on from last months’ article on ‘top cases for project managers, employer’s agents and contract administrators’.
This month we will look again at negligent certification, as well as highlighting key cases relating to schedules of payments, how to determine whether or not the works are practically complete and the tortious duties on construction professionals when advising in relation to drafting building contracts.
The standard required for practical completion
The case of Mears Limited v Costplan Services called into question whether or not a breach of contract amounted to a defect which prevented the certification of practical completion.
This case concerns the developments of student accommodation in Plymouth. Mears entered into a contract for lease with Plymouth (Notte Street) Limited who were to procure the construction of the blocks. Completion of the lease would take place within 5 days after practical completion. If, however, practical completion did not occur by the long stops date, Mears would be entitled to terminate the lease agreement.
Mears alleged that there were substantial and material deviations from the Building Documents and sought declarations preventing the certification of practical completion. This would allow Mears to terminate its agreement to take on the lease.
It was Mears’ position that at least one of the student residences had been built more than 3% smaller than the size shown on the Building Documents. Mears alleged that this was a breach of clause 6.2.1 of the agreement which stated that:
“6.2 The Landlord shall not make any variations to the Landlord’s Works or Building Documents which
6.2.1 materially affects 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”.
It was held that while there was a breach of clause 6.2, it did not necessarily prevent practical completion. Judge Waksman refused to grant a declaration to the effect that a breach of clause 6.2.1 enabled Mears to terminate the agreement, it was stressed that a material breach did not mean that it was a substantial breach of the contract.
When commenting on the meaning of practical completion, Judge Waksman observed that practical completion is not merely about the extent of the work done, but also the quality. Works need not be in complete conformity with the contract to merit practical completion provided the non-conformity is insignificant.
Mears appealed this decision, and on 29 March 2019, it was dismissed by the Court of Appeal. It was held that the failure to stay within the 3% tolerance was a breach of contract, but whether any departure from the drawings was trifling or otherwise was a matter of fact and degree. Thus, in the absence of any express contractual definition, practical completion was a question for the certifier. In this case Costplan’s agent considered that it would have certified practical completion on the basis that the departures from the 3% tolerance could be described as trifling.
This case makes it clear to developers, employer’s agents, contractors and insurers that a ‘material’ defect or variation which is a breach of contract will not automatically result in a right to terminate a relevant agreement for lease.
Take care when drafting payment schedules
Back in 2016, Anna Wood published an article titled ‘Payment schedules – when being organised leads to chaos’. This was on the back of judgment in Grove Developments Ltd v Balfour Beatty Regional Construction Ltd.
After publication, in October 2016, Balfour Beatty appealed the ruling that they had no entitlement to interim payment after the due date for practical completion. Balfour Beatty suggested that the TCC ruling created a commercial nonsense and that the parties could not have intended that, if practical completion were delayed, Balfour Beatty would have to wait for payment until the final payment date. The Court of Appeal disagreed ( EWCA Civ 990) and noted that the use of express words made it clear that the parties were only agreeing a regime of interim payments up to the contractual date of practical completion. As Anna explained in her article, the courts will generally not protect parties from bad bargains, and that was shown to be the case here.
This case and its subsequent appeal shows the dangers of agreeing payment schedules which do not facilitate for delays to expected completion dates. This could cause significant cashflow issues for contractors. Contractors should always seek to include payment schedules that include for additional interim payments if the works are extended.
Project Managers duty to ensure insurance is in place
The case of Pozzolanic Lytag Limited v Bryan Hobson Associates considers whether a project manager owes a duty of care to their client to ensure that the PI insurance of the consultants was adequate. This case concerned the construction of a concrete dome which collapsed during construction. The main contractor was primarily liable under a JCT Design and Build contract, but did not hold the required PI insurance. Pozzolanic Lytag Limited (‘PLL’) commenced proceedings against Bryan Hobson Associates (‘BHA’) for failing to ensure the contractor had proper insurance cover.
It was held that under their duty of care, BHA should have ensured that the contractor held adequate insurance. The Judge held that the fact that BHA lacked the expertise to assess the adequacy of the insurance held by the contractor did not relieve them of their responsibility. BHA could have obtained expert advice from an insurance broker. Alternatively, PLL could have informed BHA that expert advice is required and advised BHA to seek it.
In this case, the Judge took the view that project managers were to act in a proactive manner in respect to insurances. They are to inform the client and “seek to persuade the client to obtain” appropriate insurances. This implies that project managers are to do more than simply advise the client and act as a ‘post box’ for the insurance documents.