Hong Kong: Meaning of Practical Completion In Building Contracts

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:

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.

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.

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.

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