International Quarterly — Issue 26

Taking over: the meaning of completion under the 2017 FIDIC Contracts

By Jesse Way, Associate, Fenwick Elliott

In December 2017, FIDIC released the second editions of the Red, Silver and Yellow Books (“the 2017 FIDIC Contracts”). 

At the end of March 2019, the Court of Appeal in England and Wales delivered judgment in Mears Ltd v Costplan Services (South East) Ltd & Ors [2019] EWCA Civ 502 (“Mears”). 

In Mears, the Court of Appeal considered issues relating to material breaches of contract and practical completion. Judging when a project is complete, or suitable for taking over, is not always straightforward, and the Mears case provides a useful opportunity to consider the meaning of “completion” under the FIDIC Form and elsewhere. 

Completion under the 2017 FIDIC Contracts

The Red and Yellow Books are administered by an Engineer whereas the Silver Book is administered by the Employer or the Employer’s Representative.  

The Date of Completion across all three books, whilst drafted in slightly different terms, essentially means the date stated in the Taking-Over Certificate issued by the Engineer or Employer, or, if applicable, the date on which the Works or Section are deemed to have been completed.  Only the issue of the Taking-Over Certificate will be examined in this article.

The Taking-Over Certificate is issued, or deemed to have been issued, in accordance with Clause 10 (Employer’s Taking Over).  To summarise the process relating to the issue of a Taking-Over Certificate under Clause 10:

1. The Contractor may apply for a Taking-Over Certificate by giving a Notice to the Engineer or Employer not more than 14 days before the Works or Section will, in the Contractor’s opinion, be complete and ready for taking over.  

2. Within 28 days after receiving the Contractor’s Notice, the Engineer or Employer shall either:

a. issue the Taking-Over Certificate to the Contractor, stating the date on which the Works or Section were completed in accordance with the Contract, except for any minor outstanding work and defects (as listed in the Taking-Over Certificate) which will not substantially affect the safe use of the Works or Section for their intended purpose (either until or whilst this work is completed and these defects are remedied); or

b. reject the application by giving a Notice to the Contractor, with reasons. This Notice shall specify the work required to be done, the defects required to be remedied and/or the documents required to be submitted by the Contractor to enable the Taking-Over Certificate to be issued. The Contractor shall then complete this work, remedy such defects and/or submit such documents before giving a further Notice under this Sub-Clause.

3. If the Engineer or Employer does not issue a Taking-Over Certificate or reject the Contractor’s application within the 28-day period, and if certain conditions are fulfilled, the Works or Section shall be deemed to have been completed in accordance with the Contract on the fourteenth day after the Engineer or Employer received the Contractor’s Notice of application and the Taking-Over Certificate shall be deemed to have been issued.   

The Date of Completion of the Works or Section is therefore either the date stated in the Taking-Over Certificate or the date the Taking-Over Certificate shall be deemed to have been issued.  

Turning now to the decision in Mears

Mears Ltd v Costplan Services (South East) Ltd & Ors

Mears Limited (“Mears”), a provider of student accommodation, entered into an agreement for lease (“AFL”) with Plymouth (Notte Street) Ltd (“PNSL”) to lease student accommodation.  PNSL engaged a builder to construct the accommodation.  The AFL provided that 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 of more than 3% was a material breach and that this meant practical completion could be prevented and the building contract terminated. Mears appealed.

Appeal

The Court of Appeal dismissed the appeal and 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.  The parties agreed 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:

  1. The use of the words “material” and “materially” in the clause did not support Mears’ argument that the resulting breach of contract was material.  
  2. 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.
  3. 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). 

Usefully, Coulson LJ considered the authorities relating to practical completion and summarised the law on practical completion as follows:

"a) Practical completion is easier to recognise than define … There are no hard and fast rules …

b) The existence of latent defects cannot prevent practical completion … In many ways that is self-evident: if the defect is latent, nobody knows about it and it cannot therefore prevent the certified from concluding that practical completion has been achieved.

c) In relation to patent defects, the cases show that there is no difference between an item of work that has yet to be completed (i.e. an outstanding item) and an item of defective work which requires to be remedied.  Snagging lists can and will usually identify both types of item without distinction.

d) Although one interpretation of Viscount Dilhorne in Jarvis and Lord Diplock in Kaye suggests that the very existence of patent defect prevents practical completion, that was emphatically not the view of Salmon LJ in Jarvis, and the practical approach developed by Judge Newey in William Press and Emson has been adopted in all the subsequent cases. As noted in Mariner, that can be summarised as a state of affairs in which the works have been completed free from patent defects, other than ones to be ignored as trifling. 

e) Whether or not an item is trifling is a matter of fact and degree, to be measured against ‘the purpose of allowing the employers to take possession of the works and to use them as intended’(see Salmon LJ in Jarvis).  However, this should not be elevated into the proposition that if, say, a house is capable of being inhabited, or a hotel opened for business, the works must be regarded as practically complete, regardless of the nature and extent of the items of work which remain to be completed/remedied.  Mariner is a good example of why such an approach is wrong.  In consequence, I do not consider that paragraph [187] of the judgment in Bovis Lend Lease, with its emphasis on the employer’s ability to take possession, should be regarded (without more) as an accurate statement of the law on practical completion. 

f) Other than Ruxley, there is no authority which addresses the interplay between the concept of completion and the irremediable nature of any outstanding item of work.  And even Ruxley is of limited use because that issue did not go beyond the first instance decision.  But on any view, Ruxley does not support the proposition that the mere fact that the defect was irremediable meant that the works were not practically complete."

Accordingly, in relation to practical completion, the Court of Appeal held:

  1. Parties can agree parameters to guide and control certifiers, but they did not do that here.  
  2. Whether a departure from drawings is trifling or otherwise is a matter of fact and degree.
  3. In the absence of any express contractual definition or control, practical completion is, at least in the first instance, a question for the certifier.
  4. The fact that the property is habitable as student accommodation does not, by itself, mean it is practically complete.  
  5. 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. 

Mears and the 2017 FIDIC Contracts

Mearswill apply to contracts subject to English law and provide guidance to decision-makers in common law jurisdictions. And whilst the 2017 FIDIC Contracts adopt a slightly different approach, there are principles from Mears which can be applied to their administration.  In that regard, Sub-Clause 10.1 of the 2017 FIDIC Contracts provides that the Engineer or Employer shall:

“… within 28 days after receiving the Contractor’s Notice, either:

(i) issue the Taking-Over Certificate to the Contractor, stating the date on which the Works or Section were completed in accordance with the Contract, except for any minor outstanding work and defects (as listed in the Taking-Over Certificate) which will not substantially affect the safe use of the Works or Section for their intended purpose (either until or whilst this work is completed and these defects are remedied); or

(ii) reject the application by giving a Notice to the Contractor, with reasons. This Notice shall specify the work required to be done, the defects required to be remedied and/or the documents required to be submitted by the Contractor to enable the Taking-Over Certificate to be issued. The Contractor shall then complete this work, remedy such defects and/or submit such documents before giving a further Notice under this Sub-Clause [emphasis added].”

Disputes over completion dates are frequent in construction projects and it is not difficult to imagine disputes arising over the issue or non-issue of a Taking-Over Certificate.  Under the 2017 FIDIC Contracts, and consistent with the decision in Mears, unless there is a contractual provision providing otherwise, then the decision as to whether or not to issue a Taking-Over Certificate is a matter for the Engineer or the Employer in the first instance.  If parties are not content with that being the case then parties should agree parameters to guide or control the certifiers.  Any such parameters must be reflected in amendments to the contract and in clear terms.  

Disputes are likely to arise as to whether or not outstanding work or defects are “minor” and whether or not they “substantially affect” the safe use of the Works or Section for their intended purpose.  In Mears, whilst the argument was centred on whether a breach of a clause was material, the parties did agree as to whether a reduction was “material”.  Similarly, parties may attempt to agree or qualify in the terms of their contracts what constitutes “minor” outstanding work or defects and what “substantially affect” is taken to mean.  Again, if parties intend to do this then it must be reflected in amendments to the contract in clear terms.  Absent any express contractual qualification, if one applies the decision in Mears, whether or not outstanding work or defects are “minor” would be a matter of fact and degree.  As to whether or not the outstanding work or defect would “substantially affect” the safe use of the Works, there is some guidance to be found from Mears.  The Court of Appeal made clear that if a defect is trifling it cannot prevent practical completion but if a defect is more than trifling then it will prevent practical completion.  Applying that to the 2017 FIDIC Contracts, it may be argued that a defect which is trifling is one which does not substantially affect the safe use of the Works.

Conclusion

As is clear from the above, there are a number of possible scenarios where disputes may arise over the issue of a Taking-Over Certificate.  Mears has clarified the principles relating to practical completion and they may impact on those using the 2017 FIDIC Contracts.  Parties using them should be aware that any amendments, whether to place controls on certifiers, to clarify what constitutes minor defects, or otherwise, need to be in clear terms which are reflected in the contract.  Absent that, then any decision in the first instance will be a matter for the certifier.

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