Practical Completion (PC) is a concept that can give rise to a number of difficulties, not least that of identifying what the term means. Whether or not works are practically complete is a matter of fact and degree.
There is no industry standard definition of PC and consequently construction contracts need to be drafted carefully. Parties also need to think through the consequences of PC and its effect on the project, the contractual position of the parties and any linked contracts.
In this, the twelfth and final part of our series, we examine the basics and key issues surrounding PC.
The starting point is that there is no standard definition of 'practical completion' or 'substantial completion'. According to leading case law however, PC (where a Hotel was built) is "a state of affairs in which the Hotel has been completed free from patent defects other than ones to be ignored as trifling."
Indeed, a leading construction textbook authority identifies the problem as follows: "Practical Completion is perhaps easier to recognise than define". On the one hand, from a contractual perspective, a contract is not totally performed until all items of work, however minor, have been completed properly. However, in practice, buildings are handed over once the works are practically or substantially complete. What constitutes practical or substantial completion has caused much debate and uncertainty.
Freedom of contract
The key point to consider is that the parties to a construction contract are free to define what PC means and when it is achieved. Many, if not all, of the standard forms of construction contracts used widely in the UK construction industry do not clearly and unequivocally define what PC means. Moreover, each of the standard forms of construction contract takes a different approach to completion.
A common thread which runs through the standard form 'completion' clauses is that the decision as to whether or not a building is 'complete' is usually decided by the contract administrator (architect/contract administrator/engineer/employer's representative/project manager). The decision as to whether the contract works have reached completion is therefore in the discretion of the contract administrator.
Unless the parties to a construction contract expressly provide otherwise in their contract, PC does not mean that the contracts works are required to be entirely free from all defects before the works are certified as complete. PC can still occur when there are minor defects or minor items which need to be finished.
There may be undiscovered or latent defects which come to light after the building has been handed over. These will be dealt with during the defects liability period. What is critical is that the works can be substantially used for their intended purpose.
Consequences of PC
The precise consequences of construction works being certified as complete will depend upon the terms of the contract in question. However, standard form construction contracts typically provide that as of the date of completion:
- The employer is entitled to and required to take possession of the contract works
- The contractor's obligations, if any, to insure the contract works come to an end
- The contractor becomes entitled to the release of one half of any retention monies
- The period in which the contractor is liable for correcting/rectifying defects begins
- The contractor's liability, if any, to pay damages for late completion ceases
- The limitation period under the contract will commence
Effects of PC on other contracts
In some circumstances, the impact of PC may reach beyond the building contract. Completion could trigger key milestones under other connected contracts. For example, PC may trigger the grant of a lease under an agreement for lease. Often parties encounter difficulties because of drafting errors in the PC provisions in the building contract and connected agreement.
The potential problem is that the PC provisions under both connected agreements may not work together so that there is a timing issue – PC may have been achieved under the building contract but not the other agreement. An additional potential problem is that even if PC is achieved under both agreements at the same time, PC might later be revoked under the connected agreement only.
The consequence of mismatched PC provisions is that the parties may be required to take on extra commercial risks, such as additional insurance, which they had not envisaged. An obvious potential minefield is where there are divergent standards or definitions of PC under the agreements.
Points to consider
- It is advisable to expressly set out what is included and what is excluded in relation to whether or not PC has been achieved
- Review references to PC throughout the contract so that there are no inconsistencies which may potentially weaken or invalidate certain provisions of the contract
- Parties can unwittingly expose themselves by having different PC provisions in building contracts and connected commercial agreements
- PC definitions should be back-to-back in both the building contract and any connected agreement.