Laing O’Rourke Construction Ltd v Healthcare Support (Newcastle) Ltd & Others

[2014] EWHC 2595 (TCC)

The proceedings here arose out of the construction of facilities at two hospitals in Newcastle. The project was undertaken under a PFI scheme under which there was provision for an Independent Tester who had various functions of inspection and certification under the contracts. The works were to be carried out in nine phases. Phase 8 concerned two Clinical Office Blocks which Laing said was completed in mid-2012. However, the Phase Certificate of Practical Completion had not been issued by the Independent Tester. Laing therefore sought declarations in relation to the manner in which the Independent Tester was to act when deciding whether or not to issue such a certificate. For the past two years the blocks had stood empty. The Independent Tester identified five areas of the works about which the Trust had complained and which it, the Independent Tester, said were preventing it from issuing the necessary completion certificate. These included certain toilet areas which were said to be too small, insufficient daylight levels, the presence of certain structural steelwork and high-level windows that were said not to be shown in the drawings and should not be there, and a dispute about potential overheating.

The issue for Mr Justice Edwards-Stuart was whether the Trust was correct in asserting that any breach of contract relating to the quality or conformity of the works required the Independent Tester to withhold the completion certificate, or whether, as Laing said, all that was required was compliance with the Completion Criteria set out in the contract. Clause 22.5 of the Project Agreement said that:

22.5.1 Pursuant to the terms of the Independent Tester Contract, the parties shall procure that the Independent Tester shall, when he is satisfied, subject to clause 22A.3.4 that completion of a Phase has occurred in accordance with the Completion Criteria, issue a Phase Certificate of Practical Completion to that effect stating the date upon which, in his opinion, the Phase Actual Completion Date occurred … The issue of a Phase Certificate of Practical Completion shall, in the absence of manifest error, bad faith or fraud, be conclusive evidence for the purpose only of ascertaining the relevant Payment Commencement Date, that the Phase Actual Completion Date has occurred on the date stated in such certificate.
22.5.2 The Independent Tester shall issue the relevant Phase Certificate of Practical Completion notwithstanding that there are Snagging Matters relating to such Phase …
…
22.5.5 The issue of any Phase Certificate of Practical Completion in respect of a Phase shall in no way affect the obligations of Project Co under this Agreement including in respect of any Defects.”

Laing submitted that clause 22.5.1 of the Project Agreement was absolutely clear in requiring the Independent Tester to issue the completion certificate if he was satisfied that completion of a Phase had occurred “in accordance with the Completion Criteria”. There was no provision in the Project Agreement that required the Independent Tester to be satisfied that all the work had been carried out strictly in accordance with the contract before issuing a completion certificate.

Laing submitted that the building had to be fit for use and occupation consistent with the purposes for which it had been designed and built, as reflected by the provisions of the Project Agreement. A breach of the specification that did not have any materially detrimental effect on the amenity value and functional use of the building was not one that should prevent the issue of a completion certificate: still less, the existence of a dispute between the Trust and the Contractor as to what the contracts meant. The terms of the contracts did not prevent the Trust from making a claim for damages in respect of any nonconformity or defects that existed at the time of practical completion.

The Trust argued that if the Trust could identify any nonconformity with the terms of the contract and bring it to the attention of the Independent Tester, he would be bound to refuse to issue a completion certificate if he agreed that the nonconformity alleged did in fact exist. It did not matter whether the nonconformity would or would not adversely affect the amenity value or functional use of the offices.

The Judge considered that clause 22.5 required the Independent Tester to issue the completion certificate when he was satisfied that completion had occurred in accordance with the Completion Criteria. If the Independent Tester reasonably considered that a departure from the specification had not had and will not have any material adverse impact on the ability of the Trust to use the buildings for the purposes anticipated by the contract, then he may conclude that the Completion Criteria have been met. As a matter of business efficacy and commercial common sense, the Judge could not see any justification for importing a requirement that any breach of the specification, however technical or minor, must prevent the certificate from being issued.

The existence of a dispute about whether a nonconformity existed or prevented the offices from being taken into use as anticipated by the contract was not relevant to the exercise of the Independent Tester’s judgment. He had to decide for himself, after having heard from the parties. If he concluded that the alleged nonconformity did not have or was not likely to have a materially adverse effect on the use of the building as contemplated by the contract, then he could issue the completion certificate and leave the Trust to its remedy in damages.

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