JCT 101: Time and Punishment

The Contractor was employed to design and construct a much-needed new primary school in the Employer’s borough. The project has generally gone well but there have been a few workmanship issues along the way; the parties were able to address and resolve these issues amicably. The project is now 2 weeks out from the Date for Completion of the Works. The Contractor is content that it will be possible and proper to certify practical completion on the aforementioned date. The Employer, however, is concerned that the classrooms and the assembly hall in one of the blocks (Block A) still haven’t had the final fix and cleaning and that it doesn’t appear that the O&M manuals will be ready.

Some of the works still to be done in Block A are likely to take longer than 2 weeks and also involve works that will block one of the fire exits. The Date for Completion of the Works coincides with the start of term and so, despite the outstanding works in Block A the Employer decides to start using the other block (Block B), allowing access to the teachers for training and start of term preparations. The Contractor is pushing for practical completion to be certified for the entirety of the Works and is also asserting that practical completion has been achieved in respect of Block B that the Employer is now using. What is the position under the unamended JCT DB 2016?

Practical Completion and the JCT

The first thing to note is that the unamended JCT DB 2016 does not provide a definition of practical completion. It is, therefore, a matter for the parties to decide (on a project-by-project basis) what constitutes practical completion and whether the Works are ready for certification as practically complete. However, the parties should give due consideration to the body of case law on what constitutes practical completion; for example, in P&M Kaye Ltd[1], it was referred to as being ‘the absence of any patent defects in materials or workmanship’, and in Walter Lilly[2], it was summarised as meaning ‘completion for all practical purposes, and what that completion entails must depend upon the nature, scope and contractual definition of the Works’.

The contract will, however, have a Completion Date, and this date has both practical and financial consequences. Financially speaking, for example, if the Works do not achieve practical completion by that date then the Contractor will be liable to pay liquidated damages to the Employer (at the rate specified in the Contract particulars) until the date that they do. Also, once practical completion is certified the Employer must release a percentage of the Retention to the Contractor, which is usually a sizeable amount of money. Further, if there is a performance bond in place, a percentage of this will potentially be released.

In practical terms, on practical completion the site is handed back to the Employer, meaning it becomes responsible for insurance matters, and the start of the Rectification Period is triggered, meaning that for a specified period (often 12 months) the Contractor’s responsibilities are reduced to returning to site to rectify defects.

Accordingly, a Contractor will push for certification of practical completion because it is in their financial and practical interest to do so, whereas an Employer may resist certifying practical completion because it means it will have fewer financial resources available if there are defects which require rectification.

Under Clause 2.27 of the unamended JCT DB 2016, it is the Employer who issues the Practical Completion Statement and so is the ultimate arbiter of whether the Works are ready to certify. It is important that the Employer does not issue the Statement before it is satisfied that the Works are in fact practically complete because, once issued, there is no opportunity to reverse or revoke the Statement and, for all purposes under the Contract, the Works will be deemed complete as at that date. As set out above, the Contractor will then be entitled to the release of the Retention and of any funds held under a performance bond.

As per Clause 2.27, before certifying Practical Completion the Employer must also ensure that the Contractor has complied with its statutory and contractual obligations to provide documentation such as the as-built drawings (Clause 2.37) and the health and safety file including the O&M manuals (Clause 3.16 and the CDM Regulations 2015). If the Contractor fails to provide these documents, it may be in breach of both contractual and statutory requirements.

In circumstances where the Works are divided into Sections and the Contract Particulars specify that Sectional Completion applies, then the Employer may certify individual Sections as complete even when other Sections are incomplete. The same provisions of JCT DB 2016 are applicable, but a Sectional Completion Statement would be issued in place of a Practical Completion Statement.

In circumstances where the Works are not divided into sections, but parts of the Works are ready to be certified and other parts are not, then the Employer has the option of taking partial possession under Clause 2.30. This enables the Contractor to finish the outstanding Works while allowing the Employer to use the parts of the site which are safe and ready. In these circumstances:

• The Employer must take partial possession of the Works (or a Section of the Works) before Practical Completion is certified in respect of those Works.
• The Employer must obtain the consent of the Contractor to take partial possession. The Contractor must identify the Part (or Parts) taken into the Employer’s possession and the date on which possession occurred, so that the Contractor can notify the Employer of the Relevant Part and Relevant Date upon which possession was taken.
• If the Employer takes partial possession, practical completion is deemed to have been achieved in respect of that Part (or Parts).
• From the Relevant Date:
• The Rectification Period commences for the Relevant Part(s);
• The Contractor is no longer under an obligation to insure the Relevant Part(s) (if they were required to do so under Insurance Option A, B or C2) and ‘Existing Structures’ is deemed to include the Relevant Part; and
• The Employer is only entitled to liquidated damages in relation to the Part(s) which are still in the Contractor’s possession (and the rate of liquidated damages is proportionately adjusted downwards in accordance with the Contract Particulars).

Application to the Scenario

In our scenario, although the Employer has not followed the contractual process and obtained the Contractor’s consent to take possession, it has by virtue of its conduct (allowing access to teachers) arguably already taken possession of Block B rather than simply had early use of the works, as the works are complete ‘for all practical purposes’[3]. Notwithstanding the lack of consent, the Contractor should give notice to the Employer identifying the part taken into possession and the date possession was taken, as Practical Completion will be deemed to have occurred for Block B on that date. This means that, in respect of Block B, the defect rectification period will begin, the Contractor will be released from its insurance obligations and liquidated damages will no longer apply. To err on the side of caution the Employer could write to the Contractor clearly identifying the part it has taken possession of (preferably supported by a red-line drawing) and the date it took possession, to ensure there is a record of the decision in the event of a dispute.

To ensure that Practical Completion is not deemed certified for the entirety of the Works, the Employer must take care to not take possession of Block A while the outstanding Works are being carried out. This is especially important because some of the Works will block a fire exit, presenting a danger to occupants. The Employer should notify the Contractor of the Works that must be completed and the documents, including importantly the O&M files, that must be provided before practical completion will be certified.

If the Contractor fails to complete the Works in Block A before the Completion Date, then the Employer must issue a Non-Completion Notice under Clause 2.28; this notice, in combination with the other notices required under clause 2.29, will allow the Employer to levy liquidated damages for the period between the Completion Date and the actual date of completion, for the pro-rated amount of liquid damages.

Commentary

We regularly assist with putting schools’ works contracts into place, often for primary schools where increasing numbers of places are required to accommodate the growing numbers of school-aged children. The timescales are always tight as the Date for Completion needs to align with term dates so that buildings are ready for students and teachers to occupy and disruption to education is minimal. As with the above scenario, however, issues often arise and parties regularly find that the contractual processes have not been strictly followed; it is, therefore, imperative that Employers are aware of both their contractual position and the practical steps that can be taken to put themselves on the strongest footing in the event of a dispute.

[1] P&M Kaye Ltd v Hosier & Dickinson Ltd [1972] 1 WLR 146

[2] Walter Lilly & Co Ltd v Mackay [2012] EWHC 1773 (TCC)

[3] Walter Lilly & Co Ltd v Mackay [2012] EWHC 1773 (TCC)