Just what is ‘practical completion’ in construction?

Sam Bawden, construction law solicitor, discusses the meaning of 'practical completion'.

Anyone working within the construction industry will be acutely aware of the significance of practical completion.

Generally speaking, it marks the point in time when a building is just that: practically complete and capable of being occupied by the employer.  It is usually the trigger for release of the first part of any retention and the start of the applicable defects liability period, the process of determining the final account and for the transfer of risk from the contractor to the employer.

As everyone in the industry knows very well, the date of practical completion will not always be the same as the completion date specified in the contract (yes, sometimes the works take longer than anticipated...!).  Under most construction contracts, any discrepancy between those dates can have a profound effect on applications for extensions of time, claims for liquidated damages and so on.

Given the importance of practical completion, it may come as a surprise to many within the industry that “practical completion” does not have a clear legal definition.  There have been attempts to provide guidance within the case law but, in my view, there is a real limit to how much clarity can actually be achieved by phrases such as “completion for all practical purposes, and what that completion entails must depend on the nature, scope and contractual definitions of the Works, as they may have developed by way of variation or architect’s instructions,” (Walter Lilly v Mackay).

Similarly, practical completion does not always appear as a defined term in construction contracts and, where it is defined, the definitions are not always particularly helpful.  For example, they often leave it to the reasonable opinion of the Employer (or his representative) to determine when practical completion has been achieved.

As a construction solicitor, I find that these ambiguities can often lead to arguments between Contractors and their Employers as to whether or not (and, if so, when) practical completion has in fact been achieved.

An example of such an argument came to light in the recent case of GB Building Solutions Ltd v SFS Fire Services Ltd (t/a Central Fire Protection).  GB was the main contractor employed to build an office block in Manchester.  Under an amended JCT Design and Build Subcontract (2005 Edition), SFS was engaged by GB to design and install a sprinkler system.

Practical Completion was defined under the sub-contract as “the issue of the Certificate of Practical Completion under the Main Contract.”  However, the use of the words practical completion (in lower case and therefore undefined) also occurred at various places within the sub-contract.

The terms of the sub-contract required GB to maintain an insurance policy, with SFS named as a co-insured, to cover “Specified Perils” up to the “Terminal Date”.  Specified Perils included flooding.

The Terminal Date was defined as (a) the date of practical completion of the Sub-Contract Works... as determined in accordance with clause 2.20; or (b) The date of termination of the Sub-Contractor’s employment...; whichever first occurs.

Clause 2.20.1 included a mechanism for SFS to give a notice specifying the date on which it considered practical completion to have occurred and, in the absence of any dissenting notice from GB within 14 days, for practical completion to therefore be deemed to have occurred in accordance with SFS’ notice.

Around Christmas 2009 (by which time the main contract works had not reached practical completion), the development flooded.  GB alleged that the flooding was due to SFS’ negligent works and issued Court proceedings.  SFS resisted the claim, arguing that the flooding had occurred before practical completion, that it was therefore co-insured with GB and, as such, the claim was barred.  Much of this argument turned on the use of the defined term “Practical Completion” as well as those words also used in lower case throughout the contract.

Considering this as a preliminary issue, HHJ Stephen Davies sitting in the Technology and Construction Court held that:

1. The defined term “Practical Completion,” which specifically referred to the main contract works, did not dictate the date of practical completion under the sub-contract for the purpose of determining the parties’ insurance positions;
   
2. A letter from the sub-contractor dated 26 October 2009 was a notice pursuant to clause 2.20.1.  GB had not dissented and practical completion was therefore deemed to have occurred prior to the flooding; and
   
3. It was irrelevant whether the sub-contract works were actually complete when the flooding occurred, because SFS had given notice under clause 2.20.1.

Comment from a construction solicitor

The case is an interesting example of the Courts’ approach to resolving issues of ambiguity in the drafting of bespoke construction contracts (here the use of capitalised, defined terms as well as the same words appearing in lower case elsewhere within the same contract).  It highlights the obvious point that anyone entering into construction contracts would be wise to seek advice on such ambiguities prior to contracting and, failing that, at least at the point when a dispute starts to appear on the horizon.