UK: Mears Limited v Costplan Services (South East) Limited & Others [2018] EWHC 3363 (TCC)

Last Updated: 12 December 2018
Article by Nicholas Broomfield

Mears Limited v Costplan Services (South East) Limited & Others [2018] EWHC 3363 (TCC) concerned the development of student accommodation in Plymouth. Mears Limited ("Mears") alleged that there were substantial and material deviations from the contractual drawings and sought declarations preventing the certification of practical completion, the practical effect of which was to allow Mears to terminate its agreement to take a lease of the accommodation.

Mears was an expedited trial and raised narrow issues of contractual construction particular to the specific facts of the case. However, it also gave rise to interesting and important questions about the meaning of "practical completion" and when a breach of contract can prevent practical completion. Waksman J's answers to those latter questions will be of some importance to practitioners in the area.

Simon Hale of 4 New Square represented Costplan Services (South East) Limited. The decision of Waksman J is considered by Nicholas Broomfield of 4 New Square.

The facts

The claim concerned the construction two student accommodation blocks in Plymouth known as Crescent Point ("the Property"). The Property was intended to comprise a mixture of studio apartments and "clusters" of flats with individual bathrooms but shared kitchen facilities. The Property was intended to house 348 students.

The Second Defendant, Plymouth (Notte Street) Ltd ("PNS"), was the registered proprietor of the Property. On 25 November 2016 PNS appointed the First Defendant, Costplan Services (South East) Limited ("Costplan"), to act as its agent in respect of the construction of the Property.

On 20 May 2016 Mears had entered into a tri-partite agreement with the Third Defendant, J R Pickstock Limited ("Pickstock") and PNS under the terms of which it would take a 21 year lease of the Property within five working days of practical completion ("the AFL"). The material terms of the AFL, the document at the centre of the dispute, are set out at [19] of Waksman J's judgment. The AFL:

  1. Defined "Building Documents" as "the plans, drawings, specifications and other documents listed in Appendix A or as from time to time varied by agreement between the parties". Appendix A included a number of architect's drawings dated 2014 that had been used in the application for planning permission ("the Planning Drawings"). The Planning Drawings contained area measurements for each of the rooms at the Property.
  2. By clause 6.2: "The Landlord shall not make any variations to the Landlord's Works or Building Documents which:

6.2.1. materially affect the size (and a reduction of more than 3% of the size of any distinct area shown upon the Building Documents shall be deemed material), layout or appearance of the Property; or [Emphasis added]

6.2.2. result in materially increased maintenance costs or increase the frequency of component replacement cycles; or

6.2.3. are substantial or material."

c. By clause 15.7: "Except as provided in this Clause 15 (and in the Lease), with effect from the Date of Practical Completion, the Landlord is not to be liable to the Tenant under this agreement for any failure by the Landlord for any reason to comply with his obligations under Clauses 4, 5, 6, 7, 8, 9, 10, 11, 12, 14 and 15."

The AFL also contained a long stop provision which permitted Mears to terminate if practical completion had not taken place by 11 September 2018 ("the Long Stop Date").

PNS retained Pickstock to construct the Property under the terms of a JCT Design and Build Contract dated 27 May 2016 ("the Building Contract") and collateral warranties were given to Mears (in light of the AFL) by both Pickstock ("the Pickstock Warranty") and Costplan ("the Costplan Warranty").

The works were delayed and the original completion date of 11 August 2017 was missed. By June 2018 Mears had raised a number of complaints about both work that had not been completed and the quality of the completed works at the Property including, importantly, that approximately 50 rooms had been built smaller than contractually permitted by clause 6.2.1 of the AFL. However, Costplan disagreed with Mears' assessment and proposed to certify practical completion. Mears accordingly obtained an injunction on 22 August 2018 preventing certification, and an expedited trial of limited issues was ordered.

On the Long Stop Date (which had been varied to 18 September 2018 by agreement between the parties) Costplan indicated that it would have certified but for the injunction. Mears agreed not to terminate the AFL until after judgment. The positions of all parties were, therefore, reserved.

The parties' positions at trial

The claim concerned the parties' rival constructions of the AFL, and their respective positions are set out in full at paragraphs [11] and [12] of the Judgment. In summary, Mears sought various declarations:

  1. That on a true construction of the AFL, or by virtue of an implied term, Costplan could not certify practical completion whilst there were either: (i) known material or substantial defects; or (ii) subsisting material or substantial breaches of the AFL ("Declaration 1-3").
  2. That on a true construction of the AFL, or by virtue of an implied term, any failure to construct one or more of rooms in the Property more than 3% smaller than the room sizes specified in the Planning Drawings was, pursuant to clause 6.2.1 of the AFL, a material or substantial variation/defect in the work and/or a material or substantial breach of the AFL (which therefore precluded practical completion) ("Declaration 4").
  3. A number of the rooms had indeed been constructed so that they were more than 3% smaller than the room sizes as set out in the Planning Drawings ("Declaration 5").

In response, Pickstock and PNS (Costplan having adopted a neutral position) argued that:

  1. All but one of the rooms complained of by Mears were reduced in size by more than 3% when compared to the sizes specified in the Planning Drawings.
  2. However: (i) the reference to "distinct area" in clause 6.2.1 could not be properly construed to mean an individual room; (ii) even if it did, the obligation not to depart from the 3% margin should be read as applying to plans and drawings that were current at the time that the AFL was executed (i.e. May 2016) ("the Current Drawings") rather than the Planning Drawings; and (iii) Mears was estopped by representation and/or convention from asserting that the rooms were too small, in breach of contract.

As explained at [44] – [50] of the judgment, during the course of the trial Mears attempted to introduce a further alternative argument, namely that even if clause 6.2 did not render every breach material, the defects and variations complained of by Mears were in substance sufficiently material and substantial to prevent practical completion. Mears' alternative argument faced a number of difficulties, which were addressed by Waksman J at [45] – [48]. However, no formal application was made to amend and Mears' alternative argument was neither pursued by Mears in closing nor determined by the Court.

The Judgment

Waksman J handed down a detailed and thorough judgment on Friday 7 December 2018. After consideration of each of the issues summarised above, Waksman J concluded that a breach of clause 6.2 did not necessarily prevent practical completion, but a number of rooms had been constructed in breach of clause 6.2.1. Waksman J's reasoning is considered below.

Declaration 4: The construction and effect of clause 6.2

As set out above, Mears contended that any material or substantial variation for the purposes of clause 6.2 amounted to a breach of the AFL sufficient to prevent practical completion and warrant termination. Waksman J considered Mears' position at [29] – [43] but ultimately rejected it, concluding that a material variation of the works was not, necessarily, a material breach of the AFL. As the Judge explained at [34], Mears' interpretation of clause 6.2, "would mean that one material deviation in respect of one room (for example a bin store) would [entitle Mears to terminate]. That result seems to me to be so commercially absurd that it cannot be right." In so doing the Judge rejected Mears' submission that a "de minimis" test should be imposed for the purposes of determining materiality, stating that there was "much ground" between a de minimis breach on the one hand and a material breach on the other.

In addition to the foregoing, at [39] – [42] Waksman J rejected Mears' submission that unless any breach of clause 6.2 prevented practical completion, it would lead to an injustice by allowing the contract-breaker to escape the consequence of his breach of contract on the grounds that: (a) practical completion despite breaches of clause 6.2 did not leave Mears without a remedy (see below); and (b) Mears' case was that any breach of clause 6.2 prohibited practical completion, but it was necessarily fact dependent and Mears' particular allegations of breach were not before the Court.

Other remedies available to Mears

Having rejected Mears' construction of clause 6.2, Waksman J turned to consider the other remedies available to Mears following practical completion. Despite finding at [52] that clause 15.7 of the AFL prevented a discrete claim for breach of contract after practical completion, Waksman J concluded at [53] – [69] that practical completion would not necessarily leave Mears without a remedy if it transpired that practical completion should not have been certified:

  1. Firstly, it had been agreed between the parties that a certificate of practical completion issued by Costplan was not final or conclusive and could therefore be "reopened" by the Court in any event once the breaches alleged by Mears had been fully investigated.
  2. Secondly, the terms of the putative lease required the landlord to "carry out repairs arising from any Inherent Defect". The Judge was careful to express no view on the interpretation of the lease.
  3. Thirdly, Mears may have remedies against Pickstock and/or Costplan pursuant to the Pickstock and Costplan Warranties. However, as with the construction of the putative lease, Waksman J was careful to express that he was making no findings in respect of the same.

As the issues in dispute were limited in scope, Waksman J was careful to limit the breadth of his findings. However, he was equally careful to explain at [68] that he could not "see any basis for any of the Defendants contending hereafter that some other claim later made by Mears would be liable to be struck out on Henderson v Henderson principles." Claims in respect of Mears' "other remedies" therefore remain at large.

Declarations 1 – 3: effective practical completion

Although Waksman J's decision in respect of Declaration 4 was determinative, he proceeded to consider Mears' contention that there could not be practical completion if there were material and substantial defects in the works and/or breaches of the AFL (i.e. Mears' case in respect of Declarations 1 – 3).

Despite both using the phrase "practical completion", neither the AFL nor the Building Contract properly defined the term. Following consideration of the authorities and textbooks, Waksman J adopted the statement of principle at paragraph 20-120 of Keating on Construction Contracts (9th edition) that:

"(a) the Works can be practically complete notwithstanding that there are latent defects;

(b) Certificate of Practical Completion may not be issued if there are patent defects. The Defects Liability Period is provided in order to enable defects not apparent at the date of Practical Completion to be remedied.

(c) practical Completion means the completion of all the construction work that has to be done; and

(d) however, the Architect is given a discretion ... To certify Practical Completion where there are very minor items of work left incomplete on "de minimis" principles."

He also made the following additional observations at [77] and [78]:

"77. Beyond those statements of principle, however, I would add some further observations. First, the notion of practical completion might be thought to connote no more that the apparent finishing of all the work that has to be done. Thus the failure yet to construct a part of the building, as required by the contract would prevent practical completion. In a very trivial case, practical completion might be still be certified with an additional requirement to provide the missing element for example a gate at the side of a newly built house or, even more minor, the requisite lock for the gate. However, it is plain that practical completion is not merely about the extent of the work done but also, at least in some respects, its quality. Work that has either not been done at all when it should have been, or which has been done but done badly, could both equally be described as "defective". Thus to supply and purportedly finish the construction of a central heating system but which in a real sense fails to work could prevent the issue of practical completion see, for example, the decision of the Court of Appeal in Bolton v Mahdeva [1971] 2 WLR 1009, referred to at paragraph 4-019 of Keating. If it were otherwise, it would make no sense to say that if there are patent defects, this could prevent practical completion.

78. There is a gloss on this, however, which is that the works need not be in every respect in complete conformity with the contract in order to merit practical completion, provided that any non-conformity is insignificant, a matter which will usually be left to the professional judgment of the certifying entity (This is made clear in the AFL because Costplan can provide the certificate for the completion of outstanding works and rectification of snagging as indeed it has done in the draft certificate."

Waksman J concluded at [79] that: "there will be practical completion if to all intents and purposes the building is complete. So the intent and purposes of the building is key. When the building is intended to house people, that has led to an emphasis on it being fit for occupation by such people." However, he emphasised that: (a) whether a building is "fit for occupation" is a highly fact sensitive question that cannot be determined in a vacuum [80]; and (b) simply because a building is intended to house people that is not say that breaches that do not affect the building's ability to house people cannot prevent practical completion [81].

As a result of the foregoing, Waksman J held that whether or not an irremediable breach prevents practical completion is fact sensitive: it neither always nor never prevents practical completion, but will be a matter for the trial judge in each individual case.

Declaration 5: The contractual drawings and breach of clause 6.2.1

The first issue arising was what was meant by a "distinct area" in clause 6.2.1 of the AFL. Mears' position was that it applied to any room. This was disputed by Pickstock and PNS, who argued that those words should not, in the AFL, be taken to embrace so small an area as individual rooms.

At [108] – [111] the Judge accepted Mears' case that each room in the Property was a "distinct area" for the purposes of clause 6.2.1 because, inter alia: (a) a "distinct area" is something less than the whole Property; (b) it makes sense to interpret "distinct areas" as including rooms because they were given sizes in the Planning Drawings (which formed part of the Building Documents); (c) it made sense for each of the areas that had contractual effect to have been sized on the plans.

The next issue was to construe the AFL and determine from which set of drawings the distinct areas were to be taken., After consideration of the wording of clause 6.2.1 and the principles of construction laid down in Arnold v Britton[2015] UKSC 36 and Arnold v Britton[2017] AC 1173, Waksman J held that Pickstock and PNS' case that the Current Drawings were the contractual set was a construction required impermissible damage to be done to the language of clause 6.2.1, or for the obvious meaning of the words used by the draftsman to be added to or changed. Wasman J found that it was clear that the Planning Drawings were intended to form part of Appendix A and there was nothing unworkable, nonsensical or unreasonable in the parties being bound to those drawings simply because they had earlier formed part of the planning application, especially in circumstances where they were the only set of drawings that purported to be a complete specification of area and there was a permissible 3% margin of variation pursuant to clause 6.2.1 which would allow the plans to develop.

Waksman J also rejected Pickstock and PNS' claim that a term should be implied to make the Current Drawings the object of clause 6.2.1. Applying the test adopted by the Supreme Court in Marks and Spencer v BNP Paribas[2015] UKSC 71 and his findings of fact referred to above, Waksman J held that business efficacy did not require the implication of such a term; the AFL operated perfectly well without it. This finding was reinforced by the fact that the term that Pickstock and PNS sought to imply "is not really filling a gap in the contract; it is changing and is inconsistent with the express language of the contract."

As a result, he held that Mears was correct in its case that the Planning Drawings were the 'benchmark' against which any deviations had to be measured. This entailed that around 50 of the rooms had been constructed too small, in breach of clause 6.2.1. Therefore Waksman J granted Declaration 5.

Estoppel

Pickstock and PNS also raised estoppel defences at [113] – [154], seeking to argue that Mears was estopped from denying that the Planning Drawings had been superseded. The gist of this argument was that all parties had been working to the later Current Drawings, and that was commonly understood that the Planning Drawings did not represent what would actually be constructed.

Waksman J considered the principles summarised by Briggs J (as he was then) in HMRC v Benchdollar Limited [2010] 1 All ER 174 and Stena Line v Merchant Navy [2010] EWHC 1805 to the AFL, noting at [124] – [125] that because the AFL was a tripartite agreement any common assumption had to be shared amongst all three parties.

Following consideration of the evidence, including the evidence of the witnesses at trial, Waksman J found that none of the elements set out at [52] of Benchdollar were satisfied. Mears was neither focussing on individual room sizes, nor was it aware that the Property was not being built in accordance with the Planning Drawings. Further, Mears never represented to Pickstock or PNS that the Property should be build other than in accordance with the Planning Drawings and neither Pickstock nor PNS could reasonably have relied upon Mears' silence as acquiescing in their decision to do so.

Commentary

The conclusions of Waksman J in Mears Limited v Costplan Services (South East) Limited & Others resolve the declarations that were in dispute between the parties for the time being, but there is a clear prospect of further litigation in respect of the Property. Moreover, Waksman J's judgment is worthy of note by construction, insurance and professional liability lawyers for several reasons.

Firstly, the absence of a contractual definition of "practical completion" is not an uncommon problem in construction disputes. If, or when, practical completion has taken place will always be fact specific and will require determination on a case by case basis, but Waksman J's analysis at [75] – [82] will be useful guidance in later cases. The particular emphasis placed by Waksman J on the "intent and purpose of the building" at [79], albeit subject to the caveats at [80] and [81], is of particular note.

Secondly, Mears provides an interesting analysis of when breaches of contract can prevent practical completion taking place. Waksman J's judgment indicates that the Court will treat separately questions concerning the materiality of a variation or defect and questions regarding the materiality of a breach of the building contract. As Waksman J explained, a "material" defect is not necessarily a breach capable of preventing practical completion or permitting termination of the contract; such a conclusion risks giving rise to "commercial absurdity". However, the decision in Mears does not prevent parties regulating their position by the express terms of a written agreement.

Finally, Mears reaffirms the Court's reluctance to do unnecessary violence to the language of the draftsman in the name of commerciality when construing contractual documents if it is unnecessary to do so. Although each case necessarily turns on its own facts, Mears serves as a warning to those giving contractual force to specific sets of drawings.

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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