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Completion certificates: what do they certify and what happens if they are wrong?

The Court of Appeal’s decision earlier this year in Hunt and others v Optima (Cambridge) Ltd and others set me thinking about completion certificates in the context of construction projects generally. 

Hunt v Optima concerned a project for the construction of residential flats. One of the issues was whether the architect owed a tortious duty of care (for negligent misstatement) to individual flat purchasers when it certified that each flat had been generally constructed to a satisfactory standard.

The court (in overturning the first instance decision) held that, in principle, a professional consultant’s certificate may found a claim for negligent misstatement, depending on the wording of the certificate. However it re-iterated that, to succeed in such a claim, the claimant must show that it relied on the statement in question. In this case, the negligent statements were contained in certificates that were provided to buyers after completion of the purchase. The key element of reliance was missing. Given that the developer was in administration, this decision effectively left the claimants without a remedy in respect of the serious defects in their properties, despite assurances to the contrary during the course of their respective transactions.

Completion in the commercial context

Completion, and what is required to achieve “completion”, remains an esoteric concept, despite its commercial and legal importance. For all sorts of reasons, it is essential to be clear in your construction contract as to when completion will happen and what the triggers for completion will be. In particular, commercial parties need to think carefully about – and, in appropriate cases, specify – what must be achieved or provided before a building or other facility can be regarded as “complete”, rather than simply relying on vague legal concepts or the discretion of the certifier. Likewise, parties should look with suspicion on a provision that “deems” completion to take place when certain events occur.

Many of the construction standard forms refer to documents being provided or actions carried out “on practical completion”, whatever that may mean; or (worse, from a reliance perspective) “within [x] weeks after practical completion”. Such bare contractual obligations are likely to be difficult to enforce in practice. Much better to state that they must be provided or carried out “as a condition precedent” to practical completion.

When is a project complete?

What is required for “completion” will vary from project to project. For example, in process plant/energy projects, the plant must pass specific tests, among other things, before it can be regarded as “complete”. There will be different elements to completion in this type of project: completion of construction, completion of performance testing and completion in the sense of “taking over” the plant. If the testing requirements are not properly defined for each stage and completion is certified, or “deemed” completion occurs, the employer may be left with limited – or no – remedies for delay and/or performance shortfall.

In PFI/PF2 projects, “completion” has a slightly different emphasis. The contracting authority is, in general, buying a service it can use, rather than a defect-free building at “completion”. This is illustrated by the recent case of Laing O’Rourke Construction Ltd v Healthcare Support (Newcastle) Ltd and others. In that case a dispute arose as to whether any breach of contract relating to the quality or conformity of the works, however minor, required the Independent Tester to withhold the completion certificate (the wider interpretation) or whether the contractor was merely required to comply with the Completion Criteria as defined and specified in the contract (the narrower construction). The judge agreed with the narrower construction, but acknowledged that a zero tolerance approach may have been appropriate if the dispute concerned defects in clinical facilities and equipment (as opposed to office accommodation for hospital staff, which had remained unoccupied for over two years as a result of the dispute). Contrast this with completion criteria for a secure accommodation project, where a defect-free facility is precisely what the contracting authority requires at completion because of the security risk around remedying defects once the facility is in operation.

Commercial developments experience similar tensions. The various parties involved in a transaction – developers, funders, contractors and tenants – will all have competing interests in achieving practical completion at a specific point in time. A failure to align the completion requirements of (for example) an agreement for lease with a building contract may result in one party picking up the financial consequences of another party’s breach.

Here too, funders and tenants often assume that they will have a claim against an employer’s agent or contract administrator (the “certifier”) for “wrongly” issuing one or more certificates under the contract, without fully analysing the basis on which such a claim might be founded. If there is a collateral warranty in place or third party rights have been granted, there may be a right of action in contract, but only if the certifier has failed to meet the required standard of performance (which will typically be linked to “reasonable skill and care”). Similarly any right of action in tort is likely to depend on a finding of negligent misstatement, which requires both negligence and reliance.

The harsh reality is that there is invariably an element of subjectivity in deciding whether to issue a completion certificate under a building contract. Just because another certifier may have come to a different view, this will not necessarily equate to negligence. Hence it is important to define, as clearly as possible, the criteria for completion in any specific case. If the certifier then fails to apply those criteria, a claim against him will be much easier to justify.

Practical points

The key point is not to assume that a remedy will always be available against a certifier who issues a completion certificate too early or too late, or is negligent in doing so. It may not be, as recent cases demonstrate. To mitigate the risk, make sure you specify what needs to be achieved before “completion” can take place and the effect of the completion certificate in each particular project.

Berwin Leighton Paisner LLP Gareth Stringer

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