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Complete or Not Complete, That is the Question

The achievement of completion for construction works has substantial significance for all concerned, yet it is a concept which involves an element of subjectivity. The courts of the eighteenth and nineteenth century developed the concept of an entire contract, where no payment was due until the relevant work was entirely completed. Such a concept is commercially impractical on a major construction project and to address this contractual provisions for completion are provided as the norm. These provisions introduce concepts of "substantial completion" and "practical completion". However these terms are vague and thus contract draftsman are frequently tempted to provide further, but not always better, wording, as can be illustrated by two relatively recent decisions regarding the construction of hotels.

In Mariner International Hotels Limited v Atlas Limited (reported (2007) 10 HKCFAR 246, the Court of Final Appeal considered a dispute between the owner of a hotel and a purchaser, as to whether the vendor had repudiated a sale agreement. The issue at the heart of the case was whether the hotel was practically complete in accordance with a provision of the Sale Agreement.

The parties had extended the definition of practical completion to read "practical completion of the hotel with furniture, fixtures, fittings and decoration ... and having obtained (1) the Occupation Permit ... and the Certificate of Compliance and (2) the licence granted by the Office of the Licensing Authority of Home Affairs" . The purchaser argued that this definition required the hotel to be free of all patent defects other than ones to be ignored as trifling, the vendor on the other hand argued the practical completion was achieved once the hotel was capable of being opened for business even though work was still continuing. The Court agreed with the view of the purchaser and considered that the standard required in this case was that the hotel be free from non trifling patent defects. This standard was considered to be an exacting one, which was not satisfied in the circumstances.

In reaching this conclusion, the Court took the opportunity to overturn the earlier decision of the Court of Appeal in Big Island Contractina (HK) Ltd v Skink Ltd (1990) 52 BLR 110 in which the court had felt unable to distinguish between practical completion and substantial performance and thus considered that practical completion had not been achieved where there was a relatively small amount of outstanding work and some defects. This decision was criticised at the time by the authors of the Building Law Reports and had not, in our experience, been followed by many arbitrators.

This approach is to be contrasted with that taken in the case of Vigour Limited v Hvundai Enaineerina and Construction Company Limited, in a judgement delivered on 23 August 2008. This case related to a contract between a contractor and owner for the construction of a commercial development including a hotel. The parties supplemented the definition of practical completion, by stating that practical completion would only be achieved when the works were "fully available for possession and use, subject only to minor works". Minor works were further defined not to include work which would "inconvenient or unreasonably disturb occupants". The question which the Arbitrator, and subsequently the Court, had to grapple with was whether the term "occupants" referred to hotel guests and staff or some other class of individuals.

The Court agreed with the Arbitrator that the test was not to be by reference the hotel guests or staff but to mean whoever was to next occupy the particular part or area of the hotel. Consequently the test would vary from area to area by reference to the different types of occupants who would use the different parts of the premises. Thus for example, where the cafes were only constructed to empty shell and to be fitted out by others, the test would be different to front of house areas. Similarly different tests would apply to the back of house lift lobbies and kitchens where there would be no permanent occupants.

The Court emphasized the need to construe the specific language used in a particular context against the factual matrix in existence at the time of the contract. The contrasting determinations in these two cases, serve as a salutary warning that despite the inherent uncertainty of concepts of "substantial completion" and "practical completion", considerable care needs to be taken when seeking to improve upon the wording.

Lovells, Asia Projects (Engineering & Construction) Newsletter
September 2008

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