This article was first published for the Practical Law Construction Blog.
Practical completion is a key concept in any construction project. It has a significant impact on a party’s rights and obligations, and represents a major milestone in the overall project timetable. Under the majority of construction projects, it marks the point at which the clock starts running for the overall transfer of risk from the contractor to the owner.
Despite that, practical completion can, at times, be a difficult and uncertain concept, as the parties discovered in GB Building Solutions Ltd v SFS Fire Services Ltd (t/a Central Fire Protection). The case provides a timely reminder of the confusion that can arise in relation to practical completion and the significant disputes that can hinge upon its timing.
GB Building Solutions Ltd v SFS Fire Services Ltd (t/a Central Fire Protection)
GB Building was the trial of a preliminary issue in a claim brought by a main contractor against a sub-contractor in respect of sprinkler installation works undertaken in the construction of an office building. The sub-contractor was engaged under an amended JCT Design and Build Sub-Contract, 2005 Edition.
Flooding caused damage at the site, which was alleged to be the fault of the sub-contractor. It was common ground that the flooding occurred before practical completion of the main contract but it was disputed whether it occurred before or after practical completion of the sub-contract.
The main contractor was obligated to hold a joint names insurance policy until practical completion of the sub-contract, which would provide the sub-contractor with a defence to the contractor’s claim. The relevant clause provided that:
“The Contractor shall, prior to the commencement of the Sub-Contract Works, ensure that the Joint Names Policy under whichever of Insurance Options A, B or C applies to the Main Contract is issued and/or endorsed in terms that, in respect of loss or damage by the Specified Perils to the Main Contract Works or relevant Section, work executed and Site Materials insured thereunder, either the Sub-Contractor is recognised as an Insured under that Policy or the insurers waive any right of subrogation which they may have against the Sub-Contractor; and that this recognition or waiver shall continue in respect of the Sub-Contract Works or such work in the Section up to and including the Terminal Date.”
It was therefore a crucial question whether or not practical completion of the sub-contract had been achieved before or after the flooding occurred. In the event, it was held that practical completion was achieved prior to the flooding.
What is practical completion?
There is no universal definition of practical completion and it is frequently not a defined term in the contract. This is the case in the JCT standard forms. In the amended contract in GB Building, there was further confusion imported by the use of the defined term “Practical Completion”, alongside the use of the uncapitalised “practical completion” in relation to the sub-contract, which was not defined.
The case therefore offers an interesting example of the risks that can arise from bespoke amendments to standard from contracts, especially in the context of sub-contracting. In order to deal with the ambiguity imported by these amendments, the court applied the principles of construction as set out by the Supreme Court in Wood v Capital Insurance Services. Following Wood, the court conducted the:
“… iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated.”
It reached the conclusion that the defined term of “Practical Completion” did not dictate “the date of practical completion of the subcontract works” for the purposes of judging the parties insurance position.
There is guidance available in the case law on the definition of practical completion, although it is often rather circular! For example, Westminster Corp v Jarvis and Sons suggests that practical completion is achieved at the time of:
“… the completion of all the construction work that has to be done.”
More detail was provided in the 2012 case of Walter Lilly v Mackay, in which it was observed that:
“(a) Practical completion means completion for all practical purposes, and what that completion entails must depend upon the nature, scope and contractual definitions of the Works, as they may have developed by way of variation or architect’s instructions.
(b) De minimis snagging should not be a bar to practical completion unless there is so much of it that the building in question cannot be used for its intended purposes.
(c) Practical completion requirements can be relaxed by agreement between the parties.”
It is also worth noting that a contract may provide for the deeming of practical completion following certain contractual steps, which is not dependent on practical completion in fact having been achieved. In GB Building, for example, practical completion was deemed to have been achieved for the purposes of the sub-contract after the giving of notice by the sub-contractor to that effect, if the main contractor did not challenge that notice in writing within 14 days. HHJ Stephen Davies made clear that:
“It follows, in my view, that it is completely irrelevant whether or not in fact the subcontract works were practically complete on that date. The purpose of this clause is plainly to achieve contractual certainty by this deeming process; if the main contractor wants to dispute the date notified it must take steps to do so within a specified time or lose its right to do so later.”
In any construction contract, achieving practical completion is likely to have a significant impact on the parties respective positions. In GB Building, it was the parties’ insurance position that was affected. In other cases, practical completion is likely to have an equally significant impact on the parties’ rights to claim liquidated damages or an extension of time, and liability for defects.