As we all know, ‘reasonable’ is a term contract drafters love to use. ‘Material’ is another one. For example, ‘material breach’ is often stated as a ground for termination. It is used to avoid having to prescribe the types of breach that would permit a party to terminate, thus leaving it to others to judge whether events that arise are material. One might ask ‘material to what or to whom’?
What are the consequences of a ‘material’ departure from what is specified in a contract? That was a question the Court of Appeal grappled with in March in its judgment in Mears Limited v Costplan Services (South East) Limited and others.
The Mears case was concerned with the building of two student accommodation blocks in Plymouth. Mears entered into an agreement to take a lease of the student accommodation from Plymouth (Notte Street) Ltd (PNSL). Under the agreement PNSL was responsible for building the two blocks which Mears was to lease. It engaged a contractor to build it (J R Pickstock Ltd). The agreement between Mears and PNSL stated that PNSL was not to make variations that would ‘materially’ affect the size, layout or appearance of the property. Helpfully, the agreement said that a reduction of more than 3% of any distinct area shown on the building documents would be material.
It was said that 56 of the rooms were more than 3% smaller than shown on the building documents. Where did that leave the parties? Did a material reduction in size amount to a material breach? That question was significant because it was argued that if the breach was material, Mears could terminate the agreement. What about practical completion? The Employer’s Agent (Costplan) was to determine when the works were practically complete. The agreement gave Costplan the power to issue a certificate of practical completion with a list of outstanding works attached. The shortfall in the size of the rooms was not capable of economic repair. Did that mean that a certificate of practical completion could not be issued?
The court concluded that the fact that there had been a material shortfall in a room size and that there was therefore a breach of contract, did not mean there was a material breach. To find otherwise would be to confuse two distinct concepts: the question of the tolerance on room size which, when material (as defined), would be a breach; and the concept of material breach. The parties could have stipulated that a material departure from the room size requirement would also be a material breach, but they did not.
The Mears case is one in a relatively short line of cases grappling with what ‘practical completion’ means. The court held that practical completion is easier to recognise than to define; there are no hard and fast rules. There is no difference in the way incomplete works and patent defects should be viewed. Practical completion requires completion of the works save for trifling items of outstanding work and trifling patent defects. Whether an item is trifling is a matter of fact and degree, to be measured against the purpose of allowing the employer to take possession of the works and to use them as intended. However, that does not mean that the fact that a building can be occupied and used as intended means it is practically complete. So, if there are outstanding items that cannot be considered trifling, the building will probably not be considered to be practically complete even if it can be occupied and used as intended.
Consistently with that analysis of the meaning of practical completion, the fact that a defect is not capable of economic repair is irrelevant to the question of whether practical completion has occurred. The issue is whether the defect is trifling.
Of course, the parties can define in their contract what practical completion means. Have a go without using ‘reasonable’ or ‘material’. That is not as easy as it may sound.
About the author: Mark Clinton is head of construction at Irwin Mitchell