Hong Kong: Meaning of Practical Completion In Building Contracts

Last Updated: 28 March 2007
Article by Eileen Tay

Following the recent judgment of Hong Kong's Court of Final Appeal in the case of Mariner International Hotels Ltd v Atlas Ltd, the term ‘practical completion’ in Hong Kong building contracts is now arguably a legal term of art which means a state of affairs in which the works have been completed free from patent defects other than ones to be ignored as trifling.

The facts

Two of Hong Kong's major property conglomerates, Sino and Hang Lung entered into an agreement for the sale and purchase of a hotel (the Agreement). The appellants in this case were part of the Sino group while the respondents were part of the Hang Lung group. The Agreement was dated 19 December 1996. The hotel was in the process of being built at the time the agreement was signed. Completion under the Agreement was to take place no later than 30 June 1998 and was conditional upon various events, including practical completion. The relevant clause requiring practical completion read as follows:

"Completion of this Agreement is conditional upon … the Vendor having procured the practical completion of the Hotel with furniture, fixtures, fittings and decoration … and having obtained (i) the occupation permit … and (ii) …the licence permitting the commencement of operation of the Hotel) ('the Hotel Licence) in order for the Hotel to commence business on or immediately after Completion."

On 30 June 1998, Sino, the purchaser, declined to complete the Agreement, alleging that Hang Lung, the vendor, had repudiated the Agreement despite the fact that the vendor had obtained the practical completion certificates under the building and fit-out contracts as well as the occupation permit and Hotel Licence. The purchaser's basis for alleging repudiation by the vendor were wide ranging and included complaints about the standard of fixtures and fittings, issues relating to requisitions and as to whether the vendor had good title. The vendor rejected this allegation of repudiation and in turn alleged that the purchaser had repudiated the Agreement by refusing to complete the Agreement. Judicial notice was taken of the fact that the Asian financial crisis had commenced around October 1997 causing a phenomenal crash in Hong Kong's property market which had not recovered by the time for completion of the Agreement. Both the Court of First Instance and the Court of Appeal took the view that the purchaser's refusal to complete had been motivated by this crash but at the same time recognised that motive was irrelevant to the outcome of the case.

The Court of First Instance and the Court of Appeal decided in favour of the vendor and held that the vendor had not repudiated the Agreement. The Court of Final Appeal however overturned the decision of the Court of Appeal and declared that the vendor had repudiated the Agreement. The Court of Final Appeal's judgment rested on its definition of the term ‘practical completion’ under the Agreement.

The meaning of ‘practical completion’ under the Agreement

There was no definition of the meaning of ‘practical completion’ under the Agreement. In the Court of First Instance, the Judge held that the certificates of practical completion under the building contract and fit-out contracts for the Hotel satisfied the requirement of the vendor to obtain practical completion under the Agreement.

The Court of Appeal disagreed, ruling that the requirement of ‘practical completion’ under the Agreement and the obtaining of certificates of practical completion under the building and fit-out contracts were separate matters. They held that the term ‘practical completion' under the Agreement had to be construed in the context of the Agreement as a whole and therefore had to be juxtaposed with the requirement to have secured the occupation permit and the Hotel Licence to operate followed by the concluding requirement that the Hotel could commence business on or immediately after completion of the Agreement. Using this approach, the Court of Appeal concluded that ‘practical completion’ under the Agreement meant that the Hotel should be ready for all practical purposes so that it could be used as a hotel immediately upon completion of the Agreement. The existence of defects or imperfections were immaterial so long as they did not interfere with the beneficial occupation and use of the premises as a hotel. In adopting this view, the Court of Appeal were persuaded by the testimony of expert witnesses that patent defects did not prevent practical completion taking place so long as they did not interfere with the beneficial use of the building.

The Court of Final Appeal however took a completely different approach and was persuaded by the submissions of the purchaser's counsel Mr Jonathan Sumption QC that as used in building contracts ‘practical completion’ is a legal term of art well understood to mean a state of affairs in which the works have been completed free from patent defects other than ones to be ignored as trifling. The Court of Final Appeal accepted the English authorities cited by the purchaser's counsel as convincing authority that ‘practical completion’ was a well-known legal term of art in England and saw no reason why the English definition did not also apply in Hong Kong. In accepting the purchaser's counsel's definition of practical completion, the Court of Final Appeal implicitly accepted the purchaser's counsel's submissions that

  1. In using the expression ‘practical completion’, the parties chose to employ a well-known legal term of art with an established meaning in building contracts wherein it is routinely used to mean a state of affairs in which the works have been completed free from any patent defects other than ones to be ignored as trifling under the maxim de minimis non curat lex (the law does not concern itself with trifles). The parties, being property developers, may be taken to have been aware of the meaning of practical completion in building contracts and therefore there was a strong presumption that the ordinary building contract meaning of ‘practical completion’ was intended in the Agreement.
  2. The Agreement provided for a number of things to have been done before completion of the Agreement and that there was no reason to regard any of them as qualifying any of the others. The requirement that the Hotel be ready to open for business on 30 June 1998 should not be seen as qualifying the obligation to procure practical completion.
  3. There is no reason why practical completion in the sense put forward by the purchaser should be treated as a standard so exacting that it is unreasonable to expect the vendor to achieve it. There is nothing unreasonable in expecting a vendor to deliver a building free of nontrifling patent defects. In the discharge of their obligations, building contractors have been performing to this standard for many years.

The vendor in this case had previously admitted that the Hotel was not free from non-trifling patent defects. This admission proved fatal to vendor's case in light of the Court of Final Appeal's conclusion on the meaning of practical completion. In this respect, it is noted that the purchaser's argument on the meaning of practical completion had not been put forward in the Court of First Instance which would have been the appropriate forum for dealing with any factual disputes over what amounted to trifling or non-trifling defects. The vendor had objected to this new line of argument in the Court of Appeal but this objection was rejected by the Court of Final Appeal.

Prior to the judgment of the Court of Final Appeal in this case, there was no clear legal authority that ‘practical completion’ as used in building contracts is a legal term of art. Keating on Construction Construction Contracts, 8th ed. (2006) at pp 774 observes that ‘Practical Completion is perhaps easier to recognize than to define. No clear answer emerges from the authorities as to the meaning of the term.’ Three Court of Appeal judges in this case had reviewed the authorities cited by the vendor's counsel and concluded that that they did not support the vendor's contention that practical completion was a legal term of art. The Court of Appeal concluded that the findings in the cases cited were a matter of interpretation of the particular contracts (they were 1963 and 1980 editions of the JCT and the 1963 edition of RIBA standard form contracts). From the judgment of the Court of Final Appeal, it is not clear how they came to the unqualified conclusion that the cases cited supported the purchaser's contention that ‘practical completion’ was a legal term of art in building contracts.

Conclusion

The three courts each came to a different conclusion regarding the meaning of practical completion, illustrating the ambiguity of the term and the importance of providing a clear definition of the term wherever it is used. Ultimately, the definition adopted by the Court of Final Appeal is the one that counts and while it may be possible to distinguish the decision, both Employers and Contractors in Hong Kong should be aware that there is now local authority from Hong Kong's highest court that the term ‘practical completion’ in building contracts means a state of affairs in which the building has been completed free from any patent defects other than ones to be ignored as trifling. This is possibly a rather more exacting standard than the standard which tends to be applied in practice in Hong Kong where a practical completion certificate is typically issued when the work reaches a state of readiness for use or occupation even though there is a long list of patent defects and outstanding works yet to be carried out which are arguably non-trifling. If the definition of practical completion adopted by the Court of Final Appeal is not the definition intended, then clear words to the contrary should be inserted into the building contract.

The latest standard form of building contract published by the HKIA and HKIS and the Hong Kong Government Conditions of Contractor for Building Works both use the term ‘substantial completion’ instead of ‘practical completion’ so the use of these standard form contracts may avoid the consequences of this case. Nevertheless it is still advisable to set out a clear definition of the meaning of ‘substantial completion’ if it is being used in the contract.

www.pinsentmasons.com

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions