'Practical completion' is a concept unique to construction contracts and is generally defined as the point at which construction works are complete, with the exception of minor defects that do not prevent the works from being used for their intended purpose. Other criteria might be included. Practical completion is a clear, well-defined stage within the contractual framework of a project – the works have either reached practical completion, or they have not.
Achieving 'practical completion' of the works under a construction contract is important for a number of reasons, typically:
- it triggers the release of a tranche of performance security held by the principal
- it concludes the contractor's liability to pay liquidated damages for delayed practical completion
- it results in the care of the works passing to the principal
- it concludes the principal's right to direct variations to the works.
If a party seeks to have requirements carved out from the conditions for practical completion, this needs to be expressly dealt with in the contract, including in the definition of practical completion. Where possible, this should be agreed between the parties and incorporated into the contract before the contract is executed.
The recent case of H&M Constructions (NSW) Pty Ltd v Golden Rain Development Pty Ltd (No 4) [2023] NSWSC 925 illustrates the consequences of a superintendent purporting to certify "conditional" practical completion where the full requirements of practical completion under the contract had not been met, and no concept of "conditional" practical completion actually existed or was defined under the contract.
Background
Golden Rain (Developer) engaged H&M Constructions (Builder) to design and construct apartments, terraces and public domain roads on a contaminated site in Erskineville.
All risks for remediating the site were allocated to the Builder under the contract and remediation of the contamination was also a requirement of the Development Consent for the works which the Builder was obliged to comply with.
In July 2018, the Builder asserted that it had achieved practical completion of the works, and requested the superintendent to issue a Certificate of Practical Completion. The works were late as the date for practical completion for the apartments and the terraces had already passed.
Around this time, the site auditor reported to the Developer that there was still known or suspected contamination at the site. Council also confirmed that further remediation works needed to be carried out for the works to comply with the Development Consent. The superintendent advised the Builder that it could not issue a Certificate of Practical Completion on this basis.
Despite this, the Builder insisted that the superintendent certify that practical completion had been achieved.
In September 2018, the superintendent issued a certificate to the Builder stating that the date of practical completion for the works was 7 September 2018, but that practical completion was conditional upon the completion of a series of works and requirements including the issue of an Occupation Certificate for the works. A number of these requirements, including the issue of an Occupation Certificate for the works, were requirements of practical completion as defined in the contract.
In response, the Builder claimed it had no obligation to perform or satisfy the outstanding works and requirements identified in the conditional certificate and ceased all work. The Builder asserted that the conditional certificate had confirmed that practical completion had already been achieved on 7 September 2018, and that it had no obligation to complete these works without a variation direction. On this basis, the Builder also ceased claiming extensions of time and delay costs and sought a return of 50 percent of its performance security.
The Developer rejected the Builder's interpretation of the conditional certificate and argued that practical completion would only be achieved on the completion of the conditions set out in the conditional certificate.
Decision
The Supreme Court of NSW found that:
- the contract permitted the superintendent to either issue a Certificate of Practical Completion or give reasons as to why practical completion had not been achieved. It did not authorise the superintendent to take any other step, including issuing a "conditional" Certificate of Practical Completion. On this basis, the conditional certificate had no contractual effect
- as some conditions of the conditional certificate had not been satisfied, including the fact that an Occupation Certificate had not been issued for all of the works, the Builder had not yet reached practical completion
- the Builder had unilaterally misunderstood that the effect of the conditional certificate was that practical completion had been achieved and that time had stopped for the Builder to make a claim for an extension of time and delay costs and for the Developer to levy liquidated damages. While the Developer had not corrected this misunderstanding, it had also not induced it. As such, the Court found that there was nothing to prevent the Developer having recourse to its performance security and levying liquidated damages.
Key takeaways
A contract should be administered in accordance with its terms. Circumstances often change over the course of a project such that the parties require flexibility in how the contract is administered. However, if this is the case, the parties should expressly agree the effect of any deviation from the requirements of the contract, including defining the resulting impact on their rights and obligations. Failure to do so can result in one or both parties misunderstanding their position, and potentially forfeiting their rights (for example, claims which are time barred due to a lapse of time).
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