Geoff Brewer of Brewer Consulting examines practical completion

It is often considered when an owner occupies or gains beneficial use of a building or facility, that occupation or use will amount to completion of the works in circumstances where a certificate of completion has not been issued.

The recent case of Impresa Castelli -v- Cola Holdings examined this question in the context of the JCT With Contractor's Design Standard Form of Building Contract. Cola, the employer, engaged Impresa as main contractor for the construction of the Kingsley Hall Hotel at Great Queen Street in London. The contract provided for construction to be completed within 19 months from the date of possession, and the contract sum was £10.3m.

The parties were in dispute from an early stage of the contract. A principal area of dispute concerned the extensive delays that had occurred in achieving practical completion and the dates on which practical completion was achieved. As a consequence of these disputes, the parties were also in dispute concerning Impresa's claims for additional loss and expense and Cola's claimed entitlement for liquidated damages for delay.

The original contractual date for completion of the hotel was February 1999. It was obvious to the parties this date was not going to be met. Accordingly, a meeting was held to discuss extensions of time and delay damages, among other matters.

This led to the parties agreeing a first variation agreement, the effect of which was to provide for a new date for completion in May 1999 save that the bedrooms would be made available to Cola in March 1999. A new liquidated damages provision of £10,000 per day, instead of the original rate of £5,000 per day, was also provided for.

Matters continued to progress poorly. In particular, difficulties were encountered with the air conditioning system which did not appear to be functioning correctly. As so often happens on projects of this type, Cola blamed the inadequate workforce and Impresa blamed the receipt of late instructions and variations.

The May 1999 completion date was also not met. This led to a further meeting and the parties agreeing a second variation agreement. This provided that by September 1999 access for the employer would be allowed to parts of the hotel to enable it to be fully operational, even though certain works, including commissioning of the air conditioning, would not be complete.

Various parts of the hotel were then handed over to Cola in September 1999, although Cola maintained that none of the areas handed over were properly completed.

The project works continued to progress unsatisfactorily and finally a third agreement was made by the parties, which provided for a new date for practical completion and a revised date for the imposition of delay damages.

Against this history, the parties ended up in court, with Impresa forced to defend Cola's claim for nearly £1.2m liquidated damages. Impresa argued that partial possession of the greater part of the works had occurred as a result of the agreements made between the parties, and that in consequence, only a very much reduced rate of liquidated damages per day would now be recoverable.

His Honour Judge Thornton carefully reviewed the JCT conditions. He noted that they contain an elaborate code relating to the occupation, possession and handing over of the site. By Clause 17.1 the employer is entitled to take partial possession of part of the works, whether or not that part has been completed. This can only occur with the consent of the contractor, which must not be unreasonably withheld.

Clause 17.1 provides that if partial possession occurs, the contractor gives up possession and the employer takes exclusive possession of the relevant part. Practical completion is then deemed to have occurred in respect of that part and a mini defects liability period starts to run. A partial payment of retention and a reduction of the liability to pay liquidated damages result.

A further important consideration is that the obligation to maintain joint names insurance and to reinstate the works if these are damaged, in respect of that part of the works, passes over to the employer.

Judge Thornton also noted that quite independently from partial possession, Clause 23.3.2 provides that the employer is entitled to use and occupy part or all of the works with the consent of the contractor. This provides a lesser form of physical presence on or within the works by the employer. This presence by the employer has no effect on the contractor's exclusive possession of the works, nor on the contractor's obligations and entitlements with regard to liquidated damages, retention, defects, liability and insurance. The employer is in effect a sub-licensee to the contractor, who otherwise retains its exclusive possession of the works.

It was, therefore, necessary for Judge Thornton to determine whether Cola had, by making use of substantial parts of the hotel, through the agreements that had been reached with Impresa, effectively taken back exclusive possession of those parts of the hotel (partial possession), or merely obtained use and occupation in accordance with Clause 23.3.2.

He concluded that there was nothing in the agreements which led him to believe that partial possession in accordance with Clause 17.1 had occurred. It would have been a simple matter to use the phrase "partial possession" in each of those agreements. Instead, the term "access" had been adopted, which was more naturally directly to the type of use and occupation contemplated by Clause 23.3.2.

The result was that, since the employer's occupation of the hotel did not amount to partial possession, there was no mechanism by which the liquidated damages fell to be reduced. Accordingly, the agreed rate of liquidated damages was enforceable, notwithstanding the use and occupation then being made of the hotel by Cola.