In 2018, we reported on the Technology and Construction Court judgment (TCC) in Mears Ltd v (1) Costplan Services (South East) Ltd (2) Plymouth (Notte Street) Ltd and (3) J.R. Pickstock Ltd in our update on 2018 cases relating to practical completion (PC).

Following judgment in December, part of the decision was appealed by Mears and the Court of Appeal handed down judgment on 29 March 2019.

Background

The full background to the latest decision is set out in our practical completion case law update for 2018 and only the key contextual points are therefore set out below.

  1. Two blocks of student flats in Plymouth (the Property) were constructed by JR Pickstock Ltd (JRP) for the employer Plymouth (Notte Street) Ltd (PNS) under a JCT Design and Build 2011 standard form with amendments (BC). Costplan Services (South East) Ltd (Costplan) was the Employer's Agent.
  2. In May 2016, Mears Ltd (Mears) agreed to take a 21 year lease of the Property from PNS (the Lease), with completion of the Lease to take place within five working days after PC under the BC. The Agreement for Lease (AFL) provided for a longstop date of 11 September 2018 - if PC had not occurred by that date, Mears could terminate the AFL. JRP provided warranties to Mears.
  3. Delays in the building works occurred and the original completion date in August 2017 was missed. A dispute arose with Mears making various allegations of defective/incomplete work.
  4. The dispute has given rise to various proceedings including the present case which centres on 56 student rooms that were significantly smaller than required and the effect of that variation. The crux of the substantive dispute however is being addressed in other proceedings commenced by PNS against Mears in December 2018, seeking specific performance of the AFL ie completion of the Lease. Mears maintains that it is not obliged to execute the Lease.

TCC decision and the appeal

As previously reported, in the TCC, Mears effectively failed in relation to four out of the five declarations sought - the declarations were sought in order to demonstrate the contention that Mears was entitled to terminate the AFL.

The TCC's expressed views on issues directly relating to PC under these contracts were strictly obiter (not essential to the decision and therefore not legally binding), but still instructive in summarising the principles of practical completion: neither latent defects nor minor patent defects preclude PC, subject always to the terms of the contract which will be definitive in ascertaining when PC is achieved.

The TCC decision refusing declarations 1-4 was appealed by Mears.

Court of Appeal (CA) - key issues

Mears' appeal was dismissed on all points, with particular focus on two issues.

1.The proper construction of clause 6.2.1

Much of the debate related to Clause 6.2.1 of the AFL which stated:

"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

6.2.2. result in materially increased maintenance costs or increase the frequency of component replacement cycles; or

6.2.3. are substantial or material."

It was not in dispute that 56 rooms were at least 3% smaller than specified in the AFL. It was Mears' case (which failed in the TCC) that the construction of one or more rooms outside the 3% tolerance constituted a material and substantial breach of the AFL.

In the CA hearing, Mears argued that a failure to meet the 3% tolerance "was not a question of fact and degree, but instead fell the wrong side of a contractual red line" which failure entitled Mears to treat itself as discharged from obligations under the AFL and/or should prevent certification of PC. This was not accepted by the CA - Lord Justice Coulson stated that this would be a "draconian result" that would require clear words: "there are no such words in clause 6.2.1".

The CA made a distinction between the scale of the variation and the scale of any resultant breach ie the word "materially" in clause 6.2.1 meant that a reduction of more than 3% was a material variation from that required and therefore a breach, but with no resulting assumption about the importance of that breach.

It could not be said therefore that the parties had agreed that a breach of 6.2.1 amounted (without further) to a material or substantial breach of contract. As Lord Justice Coulson stated: " The 56 separate failures to achieve the 3% tolerance amounted to 56 separate breaches of contract. Whether or not those breaches, either singularly or taken together, were material or substantial such as to justify recission, is a matter of fact and degree, not a matter of the construction of the AFL".

2.Practical completion

In the CA, PNS argued that PC was a matter of fact and degree and "so it was a matter for the certifier as to whether or not the failure to achieve the 3% tolerance prevented PC".

The CA reviewed key case law and texts and summarised the law on PC as follows.

  1. PC is easier to recognise than define - there are no hard and fast rules.
  2. Latent defects cannot prevent PC.
  3. Patent defects: in terms of snagging lists, there is no difference between works yet to be completed and defective works which need to be remedied.
  4. PC can be certified when there are no patent defects, other than trifling ones - whether or not a defect is "trifling" will be a matter of fact and degree to be measured against the employer's ability to take possession and to use the works as intended. On this last point however, Lord Justice Coulson made it clear that as a matter of principle, he did not consider the fact that the building works are in a state that allows the owner/employer to take possession to be definitive of PC without further ie there could be a situation where the owner could technically take possession but PC had not been achieved nevertheless.
  5. The CA did not agree with the proposition that the mere fact that a defect is irremediable means that PC cannot be certified.

Practical points

  • It is clearer than ever from this decision that if you want to provide that a particular failure will constitute a material and substantial breach of the contract, you need to say so explicitly in the contract wording, leaving no ambiguity.
  • As ever, what constitutes PC will be determined primarily by the terms of the contract between the parties, so be sure at the contract formation stage that the wording will establish the parameters you require.
  • Ensure that related documents in a transaction align. On this project, at least neither party was seeking to argue that there was a difference between PC under the BC and PC under the AFL - this would have added a further layer of complexity to the dispute.