What is Practical Completion?

Introduction

In the construction industry, practical completion marks one of the most important milestones in the construction contract. Generally, upon practical completion, a series of rights and obligations under the contract are triggered as a result. It is common to see that upon the issuance of the Certificate of Practical Completion, the site possession is handed over from the contractor to the employer, the first moiety of the retention sum is released, the contractor’s liability to pay Liquidated Ascertained Damages ends, and the commencement of the Defects Liability Period occurs. This is by no means an exhaustive list and various other rights and obligations can equally become the focal topic at issue. Thus, it is no coincidence that whether practical completion exists or not is often a hotbed of dispute by parties under a construction contract.

This article will explore the meaning of practical completion where the construction contract is silent on the matter and therefore, its meaning and scope are left to the courts to determine.

‘Use’ and ‘Minor Defects’

The Malaysian Court of Appeal in the case of Kerajaan Malaysia v Global Upline Sdn Bhd and another appeal [2017] 1 MLJ 170 held that in the absence of a contractual definition for practical completion, ‘completion’ means that construction works agreed to be undertaken are completed except for very minor de minimis work not carried out. It was held that ‘completion’ meant that the project should be in a state of readiness for beneficial use or occupation by the employer, notwithstanding the existence of prevailing minor defects. In this regard, what constitutes readiness for ‘use’ and ‘minor defects’ ought to be observed.

Definition of ‘Use’

Whether a project is ready for use is widely fact-specific and differs from project to project. For example, a residential home can be put to ‘use’ for its intended purpose notwithstanding the home only being partially painted. It was held in the case of Tan Kong Han v QDB Ventures Sdn Bhd [2016] MLJU 1510, that the element of ‘use’ had been achieved even though fit-out works could not be commenced. Therefore, as long as the project is substantially befitting for its intended purpose, the element of ‘use’ is satisfied.

Definition of ‘Minor Defects’

In determining whether defects are minor or serious in nature it is important to keep in mind that construction projects can virtually never be ‘perfect’. It was expressed in the case of Emson Eastern Limited (in receivership) v E.M.E Developments Limited (1991) 55 BLR 114, in light of the size, materials, site conditions, and various personnel being employed - building construction is not like the manufacture of goods. These factors make it impossible to expect perfection akin to the standards of a manufacturer. Therefore, it is highly unlikely for the courts to ever adopt such unattainable standards when determining the nature and character of defects in question.

Whether defects are minor or serious in nature is determinant on the facts and circumstances of each case. For example, in the case of KP Kunchi Raman v Goh Brothers Sdn Bhd [1978] 1 MLJ 89, it was held that the incomplete installation of a piping part in a contract for piping works was a minor defect. On the contrary, it was held in the case of Uniphone Telecommunications Bhd v Bridgecon Engineering Sdn Bhd & Anor [2011] 5 MLJ 875, that where defects require a longer duration of time to remedy, this is indicative that the defects are not merely minor but are substantial and extensive in nature.

It must also be noted that the position in the case of PS Geotechnics Sdn Bhd v Merces Builders Sdn Bhd [2000] 1 LNS 349, which followed the cases of Jarvis & Sons v Westminster Corp [1969] 1 WLR 1448 and HW Nevill v William Press [1981] 20 BLR 83, that provided that Certificate of Practical Completion cannot be issued if there are patent defects, is no longer applicable. This is because practical completion can be achieved so long as the defects are only minor and de minimis in nature. Therefore, the determining factor to be considered is predicated on the nature and severity of the defects in question; and practical completion cannot be prevented solely because the defects are patent.

Guidance on Practical Completion from the UK

More recently, the UK Court of Appeal in Mears Ltd v Costplan Services (South East) Ltd and other companies, [2019] EWCA Civ 502 (“Mears v Costplan”) provided some guidance on the meaning of “Practical Completion” for the first time in more than 50 years (in the UK).

The Facts of Mears v Costplan

In this case, the appellant, Mears Ltd (“Mears”), a provider of student accommodation entered into an agreement for lease (“AFL”) with the second respondent Plymouth (Notte Street) Limited (“PNSL”), under which Mears was to take a long lease from PNSL of two blocks of student housing. It was provided in the AFL, inter alia, that:

a) PNSL, as a landlord, shall not make any variations to the works which will materially affect the size (a reduction of more than 3% of the size of any distinct area shall be deemed material), layout or appearance of the property; and

b) If practical completion fails to occur by the long stop date, Mears would be entitled to terminate the AFL.

Mears’ case was that in accordance to the AFL, the construction of the rooms in reduction beyond the 3% tolerance would prevent the certification of practical completion. This was because the certifier was bound to recognise that failure to meet the 3% tolerance was a material breach of contract which automatically prevented such a breach to be deemed as trifling or de minimis. In this case, 56 rooms were found to be outside of the 3% tolerance threshold and therefore Mears contended that it was entitled to be discharged of its obligations under the AFL because practical completion had not (and could not have) occurred by the longstop date. It was also submitted that the fact that the property was irremediable also prevented practical completion.

Decision

On the issue of materiality, the court held that the construction of the terms of the AFL did not address the character or quality of the breach. Materiality was only introduced in relation to the room size as a mechanism to determine whether a breach had occurred or not. In this case, whether the 56 failures to achieve the 3% tolerance in size reduction constituted a material breach was a matter of fact and degree.

On the issue of practical completion, the court held that there were no defined parameters to guide or control the exercise of the certifier’s discretion under the construction contract. Therefore, in determining whether departures from the drawings were trifling or otherwise is a matter of fact and degree. It was also held that the irremediable nature of the breach is irrelevant to the issue of practical completion.

Guidance on Practical Completion

Coulson LJ, in giving the Court of Appeal judgment summarised the law of practical completion accordingly:

a) Practical completion is easier to recognise than define. There are no hard and fast rules to determine practical completion;

b) The existence of latent defects cannot prevent practical completion;

c) There is no difference between an item of work that has yet to be completed and an item of defective work that is required to be remedied;

d) Patent defects that are trifling will not prevent practical completion;

e) Whether an item is ‘trifling’ is a matter of fact and degree. It is to be measured against the purpose of allowing the employers to take possession of the works and to use them as intended. However, that does not mean that, for example, if a house is capable of being inhabited, that the works must definitively be regarded as practically complete.

f) A defect being irremediable does not necessarily entail that the works were not practically complete.

In the recent case of Jumsar (Sarawak) Sdn Bhd v Robin Dockyard & Engineering Sdn Bhd and another case [2021] 10 MLJ 424 (“Jumsar”), the court approved the finding of the learned judge in the case of Xtreme Engineering Sdn Bhd v Paragon Promenade Sdn Bhd [2019] 1 LNS 113 that held that practical completion denotes ‘a state of affairs in which the works have been completed free from patent defects other than ones to be ignored as trifling’. Furthermore, the court in Jumsar held that the certificate of practical completion is not conclusive evidence of an absence of defects, which means that there could be latent defects It is evident that these positions are in congruence with the guidance provided in the case of Mears v Costplan. It would be interesting to observe whether Malaysian courts will expressly adopt the guidance provided under Mears v Costplan in light of the existing harmonious approach currently adopted in Malaysia.

Concluding Remarks

It must be stressed that the determination of whether practical completion had been achieved must be evaluated on a case-by-case basis, taking into account the surrounding factual circumstances of each case. As provided above, this determination can be done by assessing whether the project is in a state of readiness for beneficial use or occupation by the employer, notwithstanding the existence of prevailing minor defects and also in considering the guidance found in Mears v Costplan.

There are some practical points which can be taken away from this article. Firstly, if parties intend to control the discretion upon which the practical completion is certified, they must ensure that clear wordings are implemented in the construction contract. Secondly, patent defects do not necessarily prevent the certification of practical completion. If patent defects are merely trifling then the certification of practical completion cannot be prevented; and whether defects are trifling or not is a matter of fact and degree. Finally, the certificate of practical completion can never be conclusive evidence of an absence of defects in its entirety.