Australia: How to determine the date of practical completion, in light of Abergeldie v Fairfield City Council

IN BRIEF - PRACTICAL COMPLETION CANNOT BE BACKDATED ON A CERTIFICATION OF PRACTICAL COMPLETION.

Practical completion (PC) occurs on the date a certificate of PC is issued by the Superintendent, even if the certificate states that PC occurred on an earlier date, the contractor claims that PC was achieved earlier, and the Superintendent agrees that PC was achieved earlier. This was the (perhaps surprising) conclusion of the Court of Appeal in Abergeldie Contractors Pty Ltd v Fairfield City Council [2017] NSWCA 113.

The case concerned Australian Standard contract terms that are relevantly similar to those used on most construction projects in Australia. The date of PC is a contractual trigger point that has consequences for liquidated damages entitlements, extension of time and delay damages claims, early completion bonuses, defects liability periods, final payment claims, warranties, security, care of the works, insurance and payment claims under the Building and Construction Industry Security of Payment Act 1999 (SOP Act). It is fair to say that this case could have a wide industry impact.

ADJUDICATION DETERMINATION CHALLENGED BY FAIRFIELD CITY COUNCIL UNDER SECURITY OF PAYMENT ACT

Fairfield City Council engaged a contractor to perform road works pursuant to modified AS4000 terms.

On 16 September 2016, the contractor claimed that PC had been achieved and asked the Superintendent to issue a certificate of PC. On 25 November 2016, the Superintendent issued the certificate, and stated in the certificate that PC had been achieved on 16 September 2016.

The contractor had made payment claims on 28 October and 25 November. It took the 25 November claim to adjudication and was awarded approximately $1.3 million.

HOW DO YOU CALCULATE THE DATE FOR PRACTICAL COMPLETION?

An issue arose because the contract contained a relatively common amendment that prevented more than one payment claim being made between the date of PC and the end of the defects liability period.

At first instance in Fairfield City Council v Abergeldie Contractors Pty Ltd [2017] NSWSC 166, the Council obtained an order from the NSW Supreme Court quashing the adjudication on the basis that PC was achieved on 16 September as certified, so the 25 November claim (which went to adjudication) was the second payment claim following PC and therefore invalid.

The contractor successfully appealed to the Court of Appeal arguing that PC was achieved on 25 November, the date that the certificate was issued, and not on 16 September, the date that the Superintendent had certified PC to have been achieved as stated on the face of the certificate. So, the November claim was the first claim following PC and therefore valid.

PRACTICAL COMPLETION CLAUSE 34.6

The decision turned on the construction of the following standard form clause.

"34.6 PRACTICAL COMPLETION

The Contractor shall give the Superintendent at least 14 days written notice of the date upon which the Contractor anticipates that practical completion will be reached.
When the Contractor is of the opinion that practical completion has been reached, the Contractor shall in writing request the Superintendent to issue a certificate of practical completion. Within 14 days after receiving the request, the Superintendent shall give the Contractor and the Principal either a certificate of practical completion evidencing the date of practical completion or written reasons for not doing so.
If the Superintendent is of the opinion that practical completion has been reached, the Superintendent may issue a certificate of practical completion even though no request has been made."

PRACTICAL COMPLETION DEPENDS UPON THE STATE OF THE WORKS, SUPREME COURT FINDS

At first instance, PC was held to be achieved when the works reached the required state of completion, irrespective of whether or when a certificate of PC was issued. This reflects common industry practice and is explained in the following passage:

(at [33] NSWSC 166)

The term "practical completion", consistently with the way in which it is commonly understood in the construction industry, is defined in a way that depends largely on objective facts concerning the completion of the work the subject of the contract. It is true that some of the matters depend on formation of an opinion by the Superintendent. But that opinion is in relation to matters that can be assessed objectively – such as whether the contractor has reasonable grounds for not rectifying a minor defect and whether certain documentation is essential for the use, operation and maintenance of the Works. Although, in the normal case, it might be expected that the Superintendent will form those opinions at the time the Superintendent is asked to issue a certificate, there is no reason why they could not be formed independently. Moreover, the failure of the Superintendent to form an opinion will not necessarily be fatal to the achievement of practical completion. Under cl 20 of the contract, the Council is required to ensure that at all times the Superintendent "fulfils all aspects of the role and functions reasonably and in good faith". Consequently, practical completion may be achieved even if the Superintendent does not form the relevant opinions if his failure to do so is unreasonable or lacks good faith.

Ball J drew a distinction (at [32] NSWSC 166) between the date PC actually occurs (or occurred) and the date on which a certificate of practical completion is issued:

The contract draws a distinction between practical completion and the date on which that occurs, on the one hand, and the mechanism by which proof of those matters is facilitated, on the other. The former depends on satisfaction of the various conditions set out in the definition of "practical completion". The latter depends on the issuing of a certificate by the Superintendent.

COURT OF APPEAL FINDS THAT PRACTICAL COMPLETION DEPENDS UPON THE DATE THE CERTIFICATE OF PRACTICAL COMPLETION IS ISSUED

The Court of Appeal reached the opposite conclusion and found that PC could not be reached until the Superintendent held an opinion that PC had been achieved and issued a certificate of PC (at [40] NSWCA 113):

...the conclusive event is the issuing of a certificate of practical completion, which must depend upon a contemporaneous opinion of the superintendent.

One key reason was that clause 34.6 (like most Australian Standard construction contracts) did not provide that the certificate could state the date of PC, but only that it could "evidence" it. Another was that the clause (and parts of the definition of "practical completion") referred to the Superintendent's "opinion" that PC had been reached.

The Court of Appeal appeared to be concerned that if PC only depends upon the state of the works, then it could be achieved at a point in time when a party is not aware that it has been achieved. This might make it less certain when care of the work transfers, when temporary work and construction plant need to be removed and when the defects liability period commences, since all of these events are triggered by the date of PC. It might also undermine the operation of the SOP Act because it might make it less clear when post PC payment claims need to be made.

WHAT HAPPENS IF THE COURT IS ASKED TO DETERMINE THE DATE OF PRACTICAL COMPLETION?

The contract provided (as most Australian Standard construction contracts do) that the "date of practical completion" will not be the date evidenced in a certificate of PC where another date is determined in any arbitration or litigation as the date upon which PC was reached.

The Court of Appeal stated that nothing turned on this point. However, given their decision, it is not clear in what circumstances a court would determine that PC did not occur on the date the certificate of practical completion was issued. Likely situations are if a certificate of PC is never issued, if it is delayed for arbitrary, capricious or manifestly unreasonable reasons, or if it is issued at a time when PC has clearly not occurred.

CONSEQUENCES FOR LIQUIDATED DAMAGES ENTITLEMENTS, EXTENSION OF TIME AND DELAY DAMAGES CLAIMS, EARLY COMPLETION BONUSES, DEFECTS LIABILITY PERIODS, FINAL PAYMENT CLAIMS, WARRANTIES, SECURITY, CARE OF THE WORKS AND PAYMENT CLAIMS

The new focus on when the Superintendent forms an opinion that PC has been achieved (and issues a certificate of PC) has a number of other consequences.

Firstly, PC might be achieved later than might previously have been considered to be the case. This is so because the Superintendent, on current drafting of the standard clause, will have at least 14 days to form a view that PC has been achieved (once it is notified by the contractor that PC was achieved) and cannot backdate the certified date of PC. The delay to PC may be longer depending upon how the usual contract terms are amended, and whether the Superintendent complies with the timeframes.

Secondly, liquidated damages for delay may be increased and bonuses for early completion may be reduced. Where the Superintendent unreasonably delays certification, there may be disputes over the validity of liquidated damages clauses and the operation of the prevention principal, as well as potential extension of time and delay damages claims.

Thirdly, the care of the works is likely to shift away from the Contractor later (which will have insurance implications for both parties), defects liability periods will be longer, security will not be released as quickly, and final payment claims will occur later (all relative to the start of the project).

Fourthly, contractors may be able to make (and principals may have to deal with) additional claims, particularly (but not only) claims under the SOP Act and claims relating to actual or perceived delays in PC certification.

CONTRACTUAL AND COMMERCIAL WORKAROUNDS EXIST FOR PRINCIPALS, CONTRACTORS, SUBCONTRACTORS, CONSULTANTS AND SUPERINTENDENTS

The operation of Abergeldie may be minimised or avoided:

(in the case of new projects)

  • by ensuring that your contract clearly provides that a certificate of PC can specify a date of PC which is earlier than the certificate is issued. Preconditions for PC that require the Superintendent to hold an opinion (e.g. about the state of works) may also need to be drafted so that it is clear PC can be achieved before the Superintendent actually forms that opinion. In the case of most Australian Standard construction contracts, this will require clear amendments
  • by ensuring that there is a sufficient agreed and clearly disclosed allowance in any contract program (and date for PC) for the time that the Superintendent is likely to take to issue the certificate of practical completion
  • (in the case of existing projects)

  • by managing the process to ensure that the Superintendent actually issues the certification of PC on the same date that the contractual requirements for PC have been achieved. If the parties anticipate this might not be practicable, they could agree to amendments to the existing contract similar to those in the bullet point above
  • (in the case of completed projects)

  • by the parties contractually agreeing that PC was achieved on a specified date. There may also be scope for a Superintendent to use existing contractual mechanisms (such as unilateral extension of time grants) to reduce the consequences of an unreasonably delayed certification

Principals, contractors, subcontractors, consultants and Superintendents should obtain advice on the competing considerations and if necessary implement appropriate contractual and commercial protections.

Greg Begaud Julian Mellick
Construction and engineering
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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