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Mears Ltd v Costplan Services (South East) Ltd [2019] 4 WLR 55

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30th April 2019

Summary

Whilst parties are free to agree what breaches be material or substantial for the purposes of their contract, this needs to be set out clearly; merely using the word “material” or “substantial” is not sufficient where such a term is used to identify a breach rather than the character or quality of a breach. A patent defect will prevent certification of practical completion of building works where that defect is not trifling. Whether or not that breach is remediable is ultimately irrelevant.

Facts

PNSL engaged P, a developer and building contractor, to build two blocks of student accommodation (“the Property”).

Mears, a company that provides managed student accommodation, contracted with PNSL to take a long lease of the Property post-completion in an Agreement for Lease (“AFL”). The grant of the lease would occur five days after certification of practical completion of the works.

Clause 6.2.1 of the AFL read:

“[PNSL] shall not make any variations to the [works]… which:

Materially affect the size (and a reduction of more than 3% of the size of any distinct area shown upon the Building Documents shall be deemed material), layout or appearance of the Property”

Mears discovered that many the rooms built were more than 3% smaller than the plans. It took the position that any breach of Clause 6.2.1 was a material and substantial breach that would entitle Mears to terminate the AFL and restrain certification of practical completion.

Mears first sought an injunction against Costplan (the agent contracted to certify practical completion) to restrain it from certifying practical completion of the Property. This injunction was granted in August 2018. P applied to set aside that injunction, but it was upheld in September 2018.

1. Mears then claimed five declarations: that PNSL, P, or their agent Costplan, cannot certify practical completion under the AFL whilst there are known material or substantial defects (“Declaration 1”);
2. Costplan cannot validly certify practical completion where there are material and subsisting breaches of the AFL relating to performance of the building works (“Declaration 2”);
3. Costplan, properly exercising its discretion under the AFL and its duties under a collateral warranty could not validity certify practical completion whilst there are substantial and material breaches of the AFL and/or a material and substantial defects in the works (“Declaration 3”);
4. Any failure to construct one or more of the rooms in the Property such that they are not more than 3% smaller than the sizes specified in the building documents or otherwise agreed is a material and substantial breach of the AFL or a material and substantial defect in the works (“Declaration 4”); and
5. One or more of the rooms in the Property was constructed such that it is or they are more than 3% smaller than the sizes specified in the AFL or otherwise agreed (“Declaration 5”).

Issues

1. Whether a breach of Clause 6.1.2 of the AFL was a substantial or material breach, which would allow Mears to terminate the AFL (Declaration 4); and
2. Whether practical completion of the Property could be certified (Declarations 1 – 3).

First instance

In December 2018 Waksman J granted Declaration 5, finding that 56 of the rooms were built more than 3% smaller than their specified or otherwise agreed sizes.

The judge declined to grant Declarations 1 – 4.

Declaration 4 was declined because when Clause 6.2.1 defined “material”, it did so to define what constituted a breach of the AFL. The choice of the label “material” for the purposes of identifying such a breach does not itself say anything “about the extent or importance of that breach to the Property or works as a whole.”

Accordingly, it could not be the case that all breaches of Clause 6.2.1 would count as material and substantial for the purposes of repudiation by definition. Breaches of that clause could be minor and actionable without entitling Mears to terminate the AFL.

For the purposes of Declarations 1-3, it did not follow that because a breach of Clause 6.2.1 was irremediable this should prevent certification of practical completion. Such certification could occur, but with Mears having an actionable claim for breach of contract. Ultimately, practical completion was a question of whether the building is complete for all intents and purposes. Context is key; practical completion ought not to be certified if the building were not fit for purpose. Accordingly, a building may be practically complete even with material or substantial breaches or defects if (here) still objectively fit for occupation by students. Mears appealed the decision to decline to grant Declarations 1 – 4. There was no cross-appeal on Declaration 5.

Decision on appeal

The decision below was upheld.

Parties are entitled to agree in advance what constitutes a material or substantial breach of contract. However, Clause 6.2.1 was no such agreement. The “materiality” defined in Clause 6.2.1 determined what sort of reduction in room size did or did not constitute a breach of the AFL, but did not define the character or quality of any such breach of contract.

Further, even if the parties had intended any deviation of more than 3% to be a material and substantial breach of the contract, this would be commercially unworkable; a trivial failure to meet the 3% tolerance in one room could lead to Mears determining the AFL. If this were intended “clear words would be necessary for such a draconian result and there are no such words in clause 6.2.1.”

Coulson LJ then summarised the law on practical completion at [74]. Latent defects cannot prevent practical completion. Patent defects prevents practical completion unless trifling. Whether a defect is trifling is a matter of fact and degree to be measured against the Property’s intended use. There is no authority that supports the proposition that any irremediable patent defect will prevent practical completion.

Coulson LJ noted that Costplan consider that the Property is practically complete and are willing to certify it, notwithstanding that 56 rooms fall outside the 3% tolerance. Further, they do so assumedly because these defects are considered trifling. That correctness of that view was not the subject of Mears’ appeal.

Given that a breach of Clause 6.2.1 is not automatically a material breach that would permit termination by Mears, and that the decision as to whether the Property is practically complete is Costplan’s, Coulson LJ considered it inappropriate to grant Declarations 1 – 3.

Further, it is irrelevant to the question of practical completion whether existing patent defects are irremediable. If such breaches are trifling, they cannot prevent practical completion, regardless of whether the defect is capable of economic remedy. If a patent defect is not trifling, it prevents practical completion also regardless of whether it is capable of economic remedy. Ultimately, the issue of irremediability is irrelevant to practical completion.

Accordingly, Delcarations 1 – 4 were all declined to be granted on appeal.

Comment

If parties want to agree in advance that particular breaches of a contract constitute a material or substantial breach that would permit one party to terminate, this needs to be set out clearly. The less commercially sensible or workable such a clause would be, the more clearly it should be set out.

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