Key takeaways

The NSW Supreme Court recently held that a Certificate of Practical Completion issued by a Superintendent will only be valid and have contractual effect if it complies with the terms of the contract.  

In this matter the Court determined that a ‘conditional’ Certificate of Practical Completion could not be valid if practical completion is qualified by the resolution of certain outstanding issues, without there being a contractual basis for doing so. 

The facts of this case

On 20 October 2015 H & M Constructions (NSW) Pty Ltd (Builder) entered into a design and construct contract with Golden Rain Development Pty Ltd (Developer) for approximately $44 million to design and construct a high-rise apartment block of 109 apartments, eight terraces and various public domain roads.

The works were split into two separable portions, with separable portion 1 the apartment complex and the majority of the public domain roads, and separable portion 2 the balance of the works.

Both parties were aware that the site had contaminated soil and groundwater, and all remediation risks were allocated to the Builder under the Contract.

The Builder commenced construction of the apartments in 2017 and contended that it had reached practical completion of separable portion 1 by July 2018. However, also in July 2018 the Council wrote to the Developer advising that remediation had not been met, preventing an Occupation Certificate.

On 24 September 2018 the Superintendent issued a “Conditional Certificate of Practical Completion” (Conditional Certificate) purporting to certify 7 September 2018 as the Date of Practical Completion under the contract. However, it was conditional upon the completion of ten issues, seven of which were already requirements within the definition of practical completion within the contract, including completing the remediation to obtain an Occupation Certificate.

Core issues

The heart of this dispute was the validity of the Conditional Certificate and whether practical completion had, in fact, been achieved on 7 September 2018. This was important for determination of the issues that follow practical completion, namely entitlement to liquidated damages and access to security.

It was the Builder’s position that the Conditional Certificate was validly issued under the Contract and that it had achieved practical completion on 7 September 2018. Consistent with this position, the Builder asserted a right to have its security released to the value of $2.2 million.

On the other hand, it was the Developer’s position that the Conditional Certificate could not have been a certificate of practical completion under the contract because:

1. the requirements for practical completion under the contract had not been satisfied by the Builder, and
2. the qualifications set out in the Conditional Certificate had not been satisfied.

The Developer further asserted a right to claim (including by way of having recourse to the Builder’s security) approximately $22 million in liquidated damages for late completion of the works.

Decision in this case

Finding in favour of the Developer, Stevenson J determined that the Conditional Certificate was not a valid certificate of practical completion because the relevant clause under the Contract only authorised the Superintendent to either:

1. issue a certificate of practical completion evidencing the Date of Practical Completion, or
2. give written reasons why practical completion had not been achieved.

Stevenson J found that the Conditional Certificate did not evidence the Date of Practical Completion; it instead stated what the Date of Practical Completion would be if all the specified issues were completed.

Stevenson J also found that the Conditional Certificate did not give written reasons why practical completion had not been achieved. This could not be the case in circumstances where the document stated that practical completion had been awarded, albeit conditionally upon completion of the identified issues.

Accordingly, the Superintendent did not take either of the two actions that were available to it under the terms of the contract. The Conditional Certificate was therefore invalid under the terms of the contract and of no effect.

Conclusion

Practical completion is a critical stage in a construction project; not only from the perspective of the actual building works, but also the contractual rights and obligations of the parties which flow from them. For example, standard construction contracts will generally link liquidated damages, return of security, and defect liability periods to the Date of Practical Completion.

Therefore, it is critical that contractors and principals ensure that the terms of practical completion are clear and the contractual mechanism relating to practical completion is strictly adhered to. If not, the ability of the parties to enforce those rights which are dependent on practical completion can be adversely impacted or unable to be relied on.

Further information / assistance regarding the issues raised in this article is available from the authors, Patrick Kaluski, Partner, Joshua Murgatroyd, Associate, and James Davis, Law Graduate or your usual contact at Moray & Agnew.