When Do Defects Prevent Practical Completion?

Julian Bailey, Emma Knight and Helena Payne | White & Case | April 4, 2019

Practical completion represents the physical completion of works on construction projects. Despite its importance, it is not a legal term of art, and whether or not practical completion has been achieved requires determination on a case-by-case basis.

The recent judgment in Mears Ltd v Costplan Services (S.E.) Ltd [2019] EWCA Civ 502 provides an important analysis of the interplay between patent defects and practical completion. In this case, the Court of Appeal confirmed that a material defect does not necessarily prevent practical completion from being achieved.

Key facts

In Mears v Costplan, the Court of Appeal considered the meaning of ‘practical completion’ in the context of the construction of student accommodation and a related agreement for lease.

PNSL, the employer, contracted with Pickstock, the contractor, for the design and build of student accommodation. Separately, Mears, the tenant, entered into an agreement for lease (“AFL“) with PNSL and Pickstock to take a long lease of the property following completion.

The AFL contained a longstop provision that permitted the tenant to terminate the AFL if the practical completion certificate had not been issued by the longstop date.

Further, the AFL prohibited variations to the works that materially affected the size of the accommodation rooms. It considered a reduction in size by more than 3% from the relevant drawings as material. In the event, of the intended 348 bedrooms plus kitchens and certain other rooms, 56 rooms were built more than 3% smaller than the relevant drawings. These breaches were irremediable: there was no prospect of the building being torn down and re-built.

The tenant alleged that any breach of the 3% tolerance was a material and substantial breach of the AFL, meaning that (i) it was entitled to terminate the AFL and (ii) practical completion could not be certified. At first instance, the judge ruled in favour of the employer / landlord, noting that it would be ‘commercially absurd’ if the breach of the 3% tolerance made practical completion impossible and allowed the tenant to terminate the AFL and walk away.

The tenant’s appeal was dismissed by the Court of Appeal, which held that:

  • The failure to meet the 3% tolerance was a breach of contract, but not automatically a material breach of contract allowing the tenant to terminate. The question of materiality related to room size and not to the resulting breach of contract. If the parties were to be taken to have agreed that any failure (no matter how trivial) to meet the 3% tolerance amounted to a material breach of contract, it would lead to a very uncommercial result.
  • Practical completion is a question for the certifier. Whether a derogation / breach is so material as to preclude practical completion is a matter of fact and degree in each case. Patent defects regarded as ‘trifling’ cannot prevent the certification of practical completion, whether the defect is capable of economic remedy or not. Whether the 3% tolerance breach was trifling was not a matter for the court here. The issue of economic remedy goes to the proper measure of loss, and not to the issue of practical completion.

The meaning of ‘practical completion’

The Court of Appeal reviewed the current state of the law on practical completion, making the following observations:

  • Practical completion is easier to recognise than define, and there are no hard and fast rules as to when practical completion is (or is not) achieved;
  • The existence of latent (i.e. unknown) defects cannot prevent practical completion (as they are unknown to the certifier);
  • In relation to patent (i.e. known) defects, there is no difference between uncompleted items of work and an item of defective work that requires to be remedied;
  • Some authorities suggest the existence of patent defects prevents practical completion, however the preferred view (which has been adopted in almost all cases) is that the existence of ‘trifling’ patent defects does not preclude practical completion;
  • Whether an item is ‘trifling’ is a matter of fact and degree to be measured against the intended purpose of the works; and
  • The mere fact that a defect is irremediable does not mean that works are not practically complete.

Comment

The achievement of practical completion is primarily a question of fact and judgment, which is to be determined having regard to what the contractor promised to supply, the definition (if any) of “practical completion” in the relevant contract, and whether what the contractor has supplied substantially corresponds with what the contract required so as to constitute “practical completion”. The intents and purposes of the project will be important to consider when addressing the question of whether practical completion has been achieved.

However, the Court of Appeal made clear that, in this particular case, the mere fact that the accommodation was habitable did not mean the works were practically complete. It is a question of whether any patent defects could accurately be described as trifling. If parties intend for practical completion to be dependent on certain aspects of the work being completed in accordance with the letter of the contract, they should draft carefully for this.

In contrast, a more precise approach to completion is often taken in contracts for mechanical plant or similar facilities, such as power stations. On these projects, ‘completion’ is only taken to occur if, amongst other things, certain testing and commissioning is completed satisfactorily, based on defined benchmarks. Liquidated damages may also be payable if the plant does not function according to a performance specification. Furthermore, completion may also be dependent upon the provision of “as built” documents, operation and maintenance manuals and other documents.

Exactly when practical completion will have occurred is dependent on the nature of the asset, its intended purpose and any relevant contractual provisions. Certainty on exactly when completion is achieved is important given its consequences: the commencement of the defects liability period, the potential end of liquidated damages, the possible impact on retention monies, and the movement of risk to the Employer, to name a few.

Mears v Costplan helpfully clarifies the approach that the English courts will take to determining controversies over the achievement of practical completion. But ultimately, if the contractual criteria for ‘practical completion’ are defined in only general terms, what this will mean is that disputes over the achievement of practicalcompletion will continue to arise in practice.

Avoiding Spoliation of Evidence is an Ongoing Obligation

Julian E. Nelser | Spilman Thomas & Battle | October 17, 2018

Destruction of evidence can be fatal in any lawsuit, but it is especially troubling in construction defect disputes. It’s always important to allow an opponent and their expert the opportunity to inspect premises and review the alleged defects.

A recent Pennsylvania appellate decision highlights the need to do more than just allow a site visit in a defect case. It also drives home the need for clients to advise counsel of any repairs or changes to work at issue in a lawsuit.

The plaintiff in Kinder v. Heritage Lower Salford, L.P., 2017 WL 2333765 alleged several residential construction defects, specifically water intrusion due to improper stucco installation (a real problem in Pennsylvania). All defendants except one were able to inspect the home and take photographs. The Court considered this to be a “visual” inspection.

According to the opinion, the clients had the defects repaired a few months after the visual inspection, but didn’t tell their lawyer. In turn, no one notified the defendants or their lawyers. The defendants subsequently requested a “physical” inspection with expert witnesses and learned the site had been materially and permanently altered.

The trial court granted a spoliation motion in favor of the defendants because—despite the previous inspection and the defendants’ ability to take literally thousands of photographs—no physical inspection of the property could be done in the unaltered state. They argued that experts needed to physically inspect the property and this inspection could not be duplicated by photographic or video evidence. Thus, prejudice existed.

With a spoliation sanction in hand, the defendants filed for summary judgment, which was granted. The Superior Court sustained the trial court, reiterating the affirmative duty the plaintiffs had to preserve evidence. Also, the court noted the plaintiffs had counsel. Counsel stated on the record he was unaware of the remedial work. The court was unmoved.

Moral of the story: Don’t materially change the conditions in a construction case unless you have a court order allowing it, or everyone involved in the litigation is aware and has a reasonable opportunity to do a physical inspection, not just a visual. The only exception occurs when exigent circumstances exist, e.g., a collapse, major leak, etc.

While this is an unreported case and involved residential construction, the principles hold true on any construction case (or any litigation for that matter).

Florida Supreme Court Confirms 558 is Not a Civil Proceeding, Allowing Contractors and Design Professionals to Resolve Defect Disputes as Intended by the Legislature

Brian A. Wolf and Joseph R. Young | Smith Currie & Hancock | December 14, 2017

Contractors and design professionals are entitled to notice of alleged defects in their work and the opportunity to fix them without intervention by insurance companies and needless litigation. Today, Florida’s Supreme Court in Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Co., No. SC15-1420 (Dec. 14, 2017), held that the Florida Statute Chapter 558 dispute resolution process is not a civil proceeding. This means that contractors and subcontractors who receive a 558 demand are free to participate in the notice and right to cure process without notifying their insurers of non-covered claims for construction defects unless otherwise specified in their insurance policy.

Chapter 558, Florida Statutes, was enacted almost 15 years ago with the express purpose of resolving construction defect claims without expensive and time-consuming litigation. Chapter 558 was originally known as the notice and right to cure statute. Unfortunately, the statute is now more commonly referred to as the “construction defect statute.” The trend has been for owners, contractors and design professionals to engage in expensive and protracted processes often lead by condo-lawyers and their engineering consultants, and on the other side, insurance companies, their lawyers and adjusters.

In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Co., the contractor’s reaction to an extensive 558 notice was an attempt to force its insurer to pay for the 558 process. Altman Contractors argued that its commercial general liability policy contractually obligated its insurance company to defend against the 558 process because it was no different than a lawsuit. Altman attempted to convince the Supreme Court that the 558 notice and right to cure process was a “civil proceeding” as defined by language of their insurance policy.

The Supreme Court expressly held that the chapter 558 presuit process is a mechanism for resolving disputed construction defect claims but it is not a civil proceeding. The Court reasoned that chapter 558 is a notice and repair process which is not equivalent to a lawsuit because participation is voluntary and does not involve a third-party acting like a judge. The Court noted that the 558 process does not take place in a court setting and the parties are free to resolve or not resolve the defect claims as they choose.

It is critical to note that the Supreme Court determined that that the 558 process would fit the insurance policy’s definition of a “suit” if the insured submitted to the 558 process with the insurer’s consent. The Court reasoned that the 558 process is an alternative dispute resolution proceeding as defined by the insurance policy that Crum & Forster Specialty Insurance Co. sold to Altman Contractors, Inc. The Supreme Court relied on the language of the insurance policy which included a specific definition of a “suit” in the context of the insurer’s duty to defend.

The Court’s holding is important because it allows contractors to request and obtain consent of their commercial general insurance company for the insurance company to pay for and participate in the 558 process. The Court’s holding provides contractors with guidance for triggering their insurance company’s duty to pay for the defense of a 558 proceeding. If the contractor elects to trigger defense coverage, then it is incumbent on the contractor to notify its insurer of the 558 claims and specifically request the insurer’s consent to the process before participating in the 558 process.

Contractors and design professionals who receive a 558 notice and demand to cure should take care to consult with their construction attorney to review their insurance coverage and determine whether and how to involve insurance in the 558 process. The determination will depend on whether any of the defects alleged in the 558 notice are covered by insurance and the specific triggering language of all applicable insurance policies.

The Relevance and Reasonableness of Destructive Testing

David Adelstein | Florida Construction Legal Updates | August 12, 2017

Destructive testing is a routine investigatory procedure in construction defect disputes.   The destructive testing is necessary to determine liability (causation), the extent of damage, and the repair protocol.   Destructive testing is designed to answer numerous questions:  Why did the building component fail?  Was the building component constructed incorrectly?  What is the magnitude of the damage caused by the failure? What specifically caused the damage?  What is the most effective way to fix the failure and damage?  There are different iterations to the same questions, but in many instances, destructive testing is necessary to answer these questions.

 

Claimants sometimes prohibit destructive testing.  Of course, destructive testing is intrusive.  In many instances, it is very intrusive.  But, this testing is a necessary evil.  Without this testing, how can a defendant truly analyze their potential exposure and culpability?  They need to be in a position to prepare a defense and figure out their liability.  This does not mean destructive testing is warranted in every single construction defect dispute.  That is not the case.   However, to say it is never warranted is irrational.

 

Florida Statutes Chapter 558 (the pre-suit notice of construction defects process) addresses the issue of destructive testing when parties are participating in this obligatory pre-suit notice of construction defect process:

 

(a) If the person served with notice under subsection (1) determines that destructive testing is necessary to determine the nature and cause of the alleged defects, such person shall notify the claimant in writing.

(b) The notice shall describe the destructive testing to be performed, the person selected to do the testing, the estimated anticipated damage and repairs to or restoration of the property resulting from the testing, the estimated amount of time necessary for the testing and to complete the repairs or restoration, and the financial responsibility offered for covering the costs of repairs or restoration.

(c) If the claimant promptly objects to the person selected to perform the destructive testing, the person served with notice under subsection (1) shall provide the claimant with a list of three qualified persons from which the claimant may select one such person to perform the testing. The person selected to perform the testing shall operate as an agent or subcontractor of the person served with notice under subsection (1) and shall communicate with, submit any reports to, and be solely responsible to the person served with notice.

(d) The testing shall be done at a mutually agreeable time.

(e) The claimant or a representative of the claimant may be present to observe the destructive testing.

(f) The destructive testing shall not render the property uninhabitable.

(g) There shall be no construction lien rights under part I of chapter 713 for the destructive testing caused by a person served with notice under subsection (1) or for restoring the area destructively tested to the condition existing prior to testing, except to the extent the owner contracts for the destructive testing or restoration.

If the claimant refuses to agree and thereafter permit reasonable destructive testing, the claimant shall have no claim for damages which could have been avoided or mitigated had destructive testing been allowed when requested and had a feasible remedy been promptly implemented.

Florida Statute s. 558.004(2).

 

Under this pre-suit process, if a claimant refuses to permit reasonable destructive testing, the claimant shall have no claim for damages which could have been mitigated or avoided had destructive testing been allowed and had a feasible remedy been promptly implemented.  In my opinion, this has very little teeth as it raises too many factual issues such as 1) was the destructive testing reasonable, 2) what damages could have realistically been mitigated and how do you prove this, 3) what is a feasible remedy and how is one to know whether the defendant would have even proposed or implemented a feasible remedy, 4) is the feasible remedy a remedy that mitigates future damage or fully addresses the root of the problem, and 5) what is the quantum of damages that could have been mitigated or avoided.   Establishing the reasonableness of the destructive testing is likely easy as an expert would support this.  But the same expert would have to establish the other requirements as a basis to establish an affirmative defense that some of the claimed damages the plaintiff is seeking could have been mitigated had the claimant allowed pre-suit destructive testing.

 

Oftentimes, however, a defendant wants to undertake certain destructive testing after a lawsuit has been initiated.  What happens if the plaintiff refuses such testing in this scenario?  In a recent products liability case, Westerbeke Corp. v. Atherton, 42 Fla.L.Weekly D1741c (Fla. 2d DCA 2017), a defendant wanted to perform destructive testing on a gas generator that caused an explosion on a boat.  The plaintiff did not want this testing to be performed.   In support of the testing, the defendant relied on a federal district case that applied four factors to consider whether the destructive testing is warranted:

 

1) Whether the proposed testing is reasonable, necessary, and relevant to proving the movant’s case; 2) Whether the non-movant’s ability to present evidence at trial will be hindered, or whether the non-movant will be prejudiced in some other way; 3) Whether there are any less prejudicial alternative methods of obtaining the evidence sought; and 4) Whether there are adequate safeguards to minimize prejudice to the non-movant, particularly the non-movant’s ability to present evidence at trial.

 

Westerbke Corp., supra, quoting Mirchandani v. Home Depot, U.S.A., Inc., 235 F.R.D. 611, 614 (D.Md. 2006).

 

The trial court did not apply these four factors and denied the defendant’s request to perform destructive testing on the gas generator.  On appeal (through a petition for writ of certiorari), the appellate court reversed.  Unfortunately, the appellate court punted without providing specific guidance as to what standard the trial should follow when granting or denying a request for destructive testing.  The appellate court simply held that the four factors above may provide guidance to the trial court, but are not controlling in Florida.  The appellate court further summarily pointed to the Florida’s Rules of Civil Procedure to address the issue:

 

The Florida law regarding discovery in general provides that a party in a civil case is entitled to discover evidence that is relevant to the subject matter of the case and that is admissible or reasonably calculated to lead to admissible evidence. Fla. R. Civ. P. 1.280(b)(1); Allstate Ins. Co. v. Langston, 655 So. 2d 91, 94 (Fla. 1995). In addition, “[a]ny party may request any other party . . . to inspect and copy, test, or sample any tangible things that constitute or contain matters within the scope of rule 1.280(b) and that are in the possession, custody, or control of the party to whom the request is directed.” Fla. R. Civ. P. 1.350(a)(2). “The discovery rules . . . confer broad discretion on the trial court to limit or prohibit discovery in order to ‘protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense.‘ ” Rasmussen v. S. Fla. Blood Serv., Inc., 500 So. 2d 533, 535 (Fla. 1987) (citing Fla. R. Civ. P. 1.280(c)). We conclude that the trial court departed from the essential requirements of the law in failing to apply the proper discovery standard…..

 

 

The four factors outlined above are reasonable factors that comport with Florida law – whether the testing is relevant to the subject matter of the case. The factors provide guidance as to how to determine relevancy of destructive testing during the course of a lawsuit.  Plus, the court can always impose limitations or restrictions to reduce any intrusion and protect the claimant’s interests while allowing testing to be performed.   By the appellate court punting and not even ruling on whether the destructive testing would be relevant in the underlying action, the court is simply inviting another appeal.