Deemed Practical Completion

3 December, 2002
by: Cripps

It is quite common for a Developer to require its Contractor to give access to the incoming Tenant for fit out purposes. Sometimes the Tenant is allowed in before the Contractor has reached Practical Completion. Care needs to be taken as to whether or not this activates deemed Practical Completion and the consequent inability of the Developer to deduct liquidated damages.

In a case earlier this year the Technology & Construction Court varied an Arbitrator’s Award on appeal, on a question of law. The Contractor, Skanska, appealed the Award which was in favour of the Employer, Anglo-Amsterdam Corporation Limited. As a result the Contractor was entitled to the return of liquidated damages that it had paid to the Employer.

The contract was JCT ’81 With Contractor’s Design, with amendments. The Contractor had agreed to build a purpose-built office facility in Edinburgh. The Employer had deducted liquidated damages of £180,000 from sums otherwise due to Skanska for an alleged delay from 12 February 1996. The dispute was as to whether Practical Completion had occurred on 12 February.

The Developer had entered into an Agreement for Lease. The lease was to commence on 11 December 1995, the intended date of Practical Completion under the Building Contract. In fact, the lease was entered into on 19 February 1996 because of difficulties over completion. The Tenant took occupation on 12 February 1996 following receipt of a letter to the Contractor from the Developer’s agent confirming that the Tenant would commence fit out works on 12 February. The Tenant had non-exclusive occupation of the building and the Contractor still had access to carry out its work. Site security passed to the Tenant.

The Contractor argued that Practical Completion had occurred on 12 February or that partial possession of the whole of the Works had occurred on that date so that deemed Practical Completion took place under clause 17 of JCT ’81. The Arbitrator had decided that under a stringently amended clause 16, Practical Completion had not taken place until 25 April because the air conditioning system was not working and the Contractor had failed to produce Operations & Maintenance manuals. This decision failed to take account of clause 17 which reads:

“17.1 If at any time or times before Practical Completion of the Works the Employer wishes to take possession of any part or parts of the Works and the consent of the Contractor (which consent shall not be unreasonably withheld) has been obtained, then, notwithstanding anything expressed or implied elsewhere in this Contract, the Employer may take possession thereof …

 

17.1.1 For the purposes of clauses 16.2, 16.3 and 30.4.1.2 Practical Completion of the relevant part shall be deemed to have occurred and the Defects Liability Period in respect of the relevant part shall be deemed to have commenced on the relevant date.”

 

On appeal the Employer conceded that clause 17 not only took effect when the Employer took possession of part but also when the Employer had taken possession of the whole (or parts). The Judge agreed. However, the Employer’s main argument was that the Contractor had remained in possession of the Works.

The Employer said that although the whole building was made available to the Tenant to commence fitting out, at the same time the Contractor continued to complete the Works. The Judge decided that the Contractor handed possession of the whole of the Works to the Tenant on 12 February 1996 at the Employer’s request, thereby giving up possession. The Contractor was permitted back to the site by the Tenant as necessary upon the express condition, imposed by the Developer, that the Contractor made adequate security arrangements with the Tenant on the occasions it needed to attend site. The effect was that the Tenant granted the Contractor a sub-licence for the purpose of finishing off work left incomplete or in a defective state on 12 February.

It should be noted that on the facts of this particular case, the Judge found that it was to be inferred that the Contractor had consented to give up possession of the whole site and that the Employer had not sought in the arbitration, and was therefore too late upon appeal, to seek to rely upon clause 23.3.2 and argue that the Developer and Tenant were using and occupying the Works jointly with the Contractor.

A further point which does not appear to have been addressed by the court, is the impact of deemed Practical Completion under clause 17 on the Contractor’s obligation to insure. Had clause 22A applied, then by clause 17.1.3 the obligation of the Contractor to insure the Works would have terminated inadvertently.

Employers and their agents should therefore take care to ensure that when allowing Tenants’ occupation prior to Practical Completion of the building Works, that the Contractor retains possession of the site.

Reviewed in 2015