Madeleine Brown and Bethany Gregory | Allen & Overy | June 27, 2019
A clause stating that a reduction in room size by more than 3% would be “deemed material” related only to the materiality of the variation from the contract drawings, rather than the materiality of the resulting breach of contract. Parties can agree in advance that breaches of a particular clause will be deemed material (therefore permitting the parties to treat themselves as discharged from their obligations). However, they would need to include clear language to that effect. On the facts, the court determined that the parties had agreed that a material deviation in size would be a breach of contract, but did not agree whether it would be a material breach. This ruling will be of particular interest to those in the construction industry since the judgment provides a helpful explanation of what practical completion means – the first time the court has looked at this question for 50 years: Mears Ltd v (1) Costplan Services (South East) Ltd (2) Plymouth (Notte Street) Ltd (3) J.R. Pickstock Ltd [2019] EWCA Civ 502.Plymouth (Notte Street) Ltd (PNSL) engaged a developer and building contractor to design and build student accommodation. Under an agreement for lease (the Agreement), PNSL also contracted with Mears Ltd (Mears), a company whose business involved managed student accommodation, which would take a long lease of the blocks post completion. The Agreement prohibited PNSL from making any variations to the building works which “materially” affected the size of the rooms. It also stipulated that a reduction in size of more than 3% between the contract drawings and the completed works would be deemed “material”. Eventually, 56 rooms were found to be more than 3% smaller than the plans. Mears argued that any failure to meet that 3% tolerance was, by itself, “a material and substantial breach” of the Agreement and sought a declaration to this effect at first instance. This would automatically result in Mears being entitled to determine the contract and the certifier being unable to issue a valid certification of practical completion. Waksman J refused to grant the declaration as a matter of construction of the Agreement. Non-compliance was a breach, but not necessarily a material breach In essence, the Court of Appeal affirmed the first instance decision. Whilst the court agreed that there were 56 separate breaches of contract, those breaches were not, as a matter of construction, automatically deemed to be material. Each breach needed to be considered, either alone or together, to decide whether “as a matter of fact and degree” the breach was so material as to permit Mears to treat itself as discharged from all obligations. The court confirmed that parties “to contracts of this sort” are able to agree in advance that the breach of a specified clause would be a material breach of contract. However, in this case, the parties did not make any such agreement; the materiality introduced into the relevant clause of the contract related only to the reduction in room size, rather than the resulting breach of contract. Significant consideration of the commercial reality The court held that the parties had tackled the potential problem of deciding how serious a deviation from the plans needed to be in order to be a breach of contract by specifying precisely the circumstances in which deviation from the drawings would amount to a breach. In other words, the parties agreed that there would only be a breach of contract if the size of the room was “materially affected”, setting out an agreed 3% threshold to define when the rooms would be so affected. Although this meant that immaterial deviations from the drawings would not cause a contractual breach, it also clarified that, in the event of any size difference over 3%, this would constitute a contractual breach. It was simply a mechanism by which a breach of contract could be indisputably identified. The difference lay in this point: whilst the parties agreed in advance that this would be a breach of contract, they had not agreed that it would amount to a material breach of contract with the accompanying remedies. The agreed point about materiality (ie the 3% threshold) categorised the deviation as sufficiently affecting the room size to be deemed a breach. However, it did not establish that breach’s “character or quality”. To support its finding, the court also emphasised that it would “lead to a very uncommercial result” if any crossing of the 3% limit, even if it was very trivial and regardless of which room it affected (using a bin store as an example), would automatically lead to a material breach of contract. It would be a “draconian” result if an insignificant breach could permit one side “to walk away” from the Agreement and commercial relationship; such a result should follow only from very clear contractual language. Meaning of “practical completion” Even though Mears failed to obtain the declaration it sought (meaning that practical completion could validly be certified), the Court of Appeal also helpfully considered, for the first time in 50 years, what “practical completion” actually means in construction contracts. After reflecting on previous cases, the court noted that a “certain caution” was essential in its analysis. In the court’s judgment, practical completion, which is “easier to recognise than define” and has “no hard and fast rules”:
− is in practice a “state of affairs in which the works have been completed free from patent defects, other than ones to be ignored as trifling”;
− does not treat outstanding work differently from defective work which requires a remedy;
− requires the works to be completed free from patent defects other than those which are trifling (a matter of fact and degree) against the background of the purpose of allowing individuals to take possession and use the works. In this case, the mere fact that the accommodation was habitable would not (without more) amount to practical completion; and
− cannot be prevented by the existence of latent defects or simply because a breach is irremediable. Whether or not a breach is capable of economic repair is relevant to the measure of loss but not the question of practical completion.Whilst parties can agree parameters by which the certifier is controlled and guided in his determination of whether practical completion has occurred, these were not found in the Agreement or standard forms of building contract. Whether the 56 breaches in this particular case were, or were not, trifling was a matter of fact and degree only, to be considered by the certifier, at least in the first instance. COMMENT This case was largely theoretical, as the court noted at the outset, as the parties were separately disputing a specific performance claim which would be unaffected by the arguments regarding materiality. However, it may set a precedent for cases in which the outcome is key to the commercial viability of the project. The essential point was the distinction between: (i) materiality relating to the extent of a deviation in the works from the initial building plans; and (ii) materiality in terms of how serious a breach of contract is and what remedies are therefore available to an aggrieved party. Whilst the language used in the Agreement appears uncontroversial, and many may think it clear on which side this fell, it is conceivable that further examples could come before the courts. Clients may wish to review the drafting in their contracts to identify any scope for disagreement in the event of a dispute. On the other hand, the court noted that it is wholly possible for parties to agree in advance that breach of a particular clause should be viewed as a material breach. To do so, parties to any contract (in the construction sphere or otherwise) should ensure that this is set out in clear wording, as the court was unwilling to allow any trivial breach to be deemed material without such explicit agreement, especially against a commercial background.
This is also a noteworthy judgment for those in the construction industry, as it clarifies the court’s approach towards disputes of practical completion. The court highlights that practical completion is essentially a question of fact and judgment, and that the certifier must consider whether any patent defects are “trifling”, whilst providing some clarification on previous case law. In many large construction contracts, or those for particular types of works, the concept of “practical completion” can be heavily described in the agreement and can be protected with other mechanisms. However, in all contracts, parties may want to consider whether to explicitly draft the pre-conditions for practical completion