Is a breach of contract material? Will defects or breaches of contract prevent practical completion?
The Court of Appeal recently provided – for the first time in decades – a useful summary on practical completion in the context of construction contracts.
In Mears Limited v Costplan Services (South East) Limited & Ors the Court of Appeal first had to determine whether a clause in an agreement meant that a breach of it was a material breach and then decide whether practical completion could be certified when there were known material or substantial breaches of contract.
Mears is a provider of student accommodation. Mears entered into an agreement for lease (“AFL”) with Plymouth (Notte Street) Limited (“PNSL”) to lease student accommodation. PNSL engaged a builder to construct the accommodation. If practical completion was not achieved by the relevant date, either party could terminate the AFL. Ultimately, Mears sought to be discharged from its obligations under the AFL.
The AFL provided that:
“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…”
Prior to completion of construction, it became apparent that a number of the rooms in the student accommodation were more than 3% smaller than specified. Mears took issue with this and commenced proceedings seeking declarations regarding the true construction of clause 6.2.1 of the AFL and also in respect of the certification of practical completion.
"At first instance, the TCC refused to grant declarations sought by Mears relating to whether the proper construction of clause 6.2.1 meant that a reduction of the size of an area by more than 3% was a material breach and that this meant practical completion could be prevented and the building contract terminated. Mears appealed."
At first instance, the TCC refused to grant declarations sought by Mears relating to whether the proper construction of clause 6.2.1 meant that a reduction of the size of an area by more than 3% was a material breach and that this meant practical completion could be prevented and the building contract terminated. Mears appealed.
The Court of Appeal determined that parties could agree that a breach of a particular clause of a contract amounted to a material or a substantial breach of contract. However, the parties did not do that in this case. What the parties did was agree that a breach of contract would occur if there was a reduction of more than 3% in relation to the room size. The Court held:
- The use of the words “material” and “materially” in the clause did not support Mears’ argument that the resulting breach of contract was material.
- If the parties had agreed that, it would have amounted to an uncommercial result and meant that any breach of the 3% tolerance, no matter how trivial, would have allowed Mears to determine the agreement.
- Clear words would be necessary for such a draconian result and there were no such words in the clause.
The Court also noted that PNSL was not attempting to rely on any breaches to its advantage or gain, and the question of whether or not the breaches were material or substantial would be a matter for factual assessment (there were some 56 rooms out of tolerance).
In relation to practical completion, the Court held:
- Parties can agree parameters to guide and control certifiers, but they did not do that here.
- Whether a departure from drawings is trifling or otherwise is a matter of fact and degree.
- In the absence of any express contractual definition or control, practical completion is, at least in the first instance, a question for the certifier.
- The fact that the property is habitable as student accommodation does not, by itself, mean it is practically complete.
- The issue of whether or not a breach is remediable is irrelevant to the issue of practical completion. If a defect is regarded as trifling then it cannot prevent practical completion, whether it is capable of economic remedy or not. If the defect is more than trifling, it will prevent practical completion, regardless of whether or not it is capable of remedy.
The principles surrounding practical completion will be familiar to those regularly involved in construction and construction disputes. The absence of a clear or accepted definition of practical completion, or guidance in this regard in the main forms of contract, means that practical completion has been described (including by Coulson LJ) as being “easier to recognise than to define”. However, this decision does contain a useful summary of the law on practical completion.
Further, parties should be reminded that if they want to place parameters on certifiers, then they must actually state what those parameters are in the relevant agreement. If they do not, then practical completion is, in the first instance, a question for the certifier.
Those in the construction industry will be well aware that clear drafting is essential in the preparation of contracts. This case serves as a useful reminder of the importance of clear drafting, particularly if, to use the words of Coulson LJ, a party seeks to achieve a “draconian result”.