A material variation in performance of a construction contract will not necessarily equate to a material breach of that contract, entitling the innocent party to determine the contract and prohibiting certification of the works as practically complete.
The Second Respondent (“PNSL”) contracted with the Third Respondent (“Pickstock”) to construct student accommodation. PNSL entered into an agreement for lease (“AFL”) with the Appellant. The AFL prohibited PNSL from making material variations to the size of the rooms as shown in the drawings; it was agreed that a reduction of more than 3% of the size of a room would be deemed material. It transpired that 56 rooms were more than 3% smaller than the size shown in the drawings. The Appellant argued that any material variation amounted to a material and substantial breach of contract, automatically entitling the Appellant to terminate the contract, and that no certificate of practical completion could be issued by the First Respondent (“Costplan”). At first instance, Waksman J issued a declaration that some rooms had been constructed in breach of the AFL. He declined to issue declarations to the effect that the material variation amounted to a material or substantial breach of contract, or that Costplan could not validly certify practical completion of the construction works. The Appellant appealed against the refusal to make these declarations.
The appeal determined two issues:
- The proper construction of the AFL: the Appellant sought to argue that the failure to meet the 3% tolerance “fell on the wrong side of a contractual red line” and was therefore a material breach of contract. PNSL accepted that any failure to comply with the 3% tolerance was a breach of contract, but argued that the AFL did not address the character or nature of the breach; what was deemed to be material was the reduction in size of the room, not the resulting breach of contract.
- The meaning of “practical completion”: the Appellant sought to argue that the works could not be certified as practically complete when they are known material or substantial defects, and that furthermore, the irremediable nature of the defects (the reduced room size) prevented completion as a matter of law. PNSL argued that practical completion was a matter of fact and degree, and relied on authorities which referred to the intended purpose of the works as an important way to test whether the works were practically complete.
Coulson LJ, delivering the leading judgment, held:
- The parties are entitled to agree that a breach of a particular clause amounts to a material or substantial breach of contract. However, this was not achieved in this case. The deemed materiality related to the reduction in room size, not the consequent breach of contract; the clause simply provided a mechanism by which a breach of contract can be indisputably identified. Whether or not those breaches were material or substantial is a matter of fact and degree, not a matter of construction of the AFL.
- Practical completion is easier to recognise than it is to define, and as such a “certain caution” is necessary when considering the authorities on this point. Adopting the approach of Newey J (as he then was) in H.W. Nevill (Sunblest) Limited v William Press & Son Limited (1981) 20 BLR 78 and Emson Eastern Limited (in receivership) v E.M.E. Developments Limited (1991) 55 BLR 114, Coulson LJ summarised ‘practical completion’ as “a state of affairs in which the works have been completed free from patent defects, other than ones to be ignored as trifling.” The irremediable nature of the breaches was irrelevant to the issue of practical completion. Whether or not a defect is capable of economic repair is a matter that goes to the proper measure of loss, not to practical completion.
It was therefore held that Waksman J had been right to refuse to grant the declarations, and the appeal was accordingly dismissed.
Stephenson Harwood comment
This case highlights that agreement between the parties as to what amounts to a material or substantial breach of contract should be recorded in clear terms; otherwise the materiality of the breach shall be determined by reference to fact and degree. A mechanism for identifying a material variation, and therefore a breach of contract, does not without more identify whether the subsequent breach of contract will entitle the non-defaulting party to terminate the contract.