Let's be practical: Challenging a certificate of completion

‘Practical completion is perhaps easier to recognise than to define,” says Keating, the leading construction law textbook. It also says that there is no clear answer from the authorities as to the meaning of the term.

In the usual course of things, a contractor who disagrees with a decision about practical completion (PC) can go to adjudication or court in order to get the decision of the certifier opened up, reviewed and revised.

But what if the certificate of PC is stated to be final and binding? Standard forms of contract do not say this, but there are cases where this can happen. For example, some bespoke forms of contract contain that wording. Alternatively, parties may instruct a third-party surveyor to certify PC and agree to accept the decision as final. This happens in many PFI projects, where the authority and project company jointly engage an independent tester.

A third example of where this would be the case is if a certificate of PC under a building contract is not conclusive between the employer and contractor, but is stated to be final and binding for the purpose of some other agreement. This was the position in the recent High Court case of Menolly Investments vs Cerep.

Menolly agreed to purchase shares in Cerep, a subsidiary of the US group Carlyle, as soon as PC of a development at Cheapside in the City of London had been certified under a separate building contract (between one of Carlyle’s subsidiaries and its building contractor). The share sale agreement said that, for the purposes of Menolly’s obligation to buy the shares, the certificate of PC was final and binding and counted as conclusive evidence that PC had been reached. The only exception to this was in the case of manifest error or fraud.

What can one do when confronted with this sort of wording, in a situation in which it seems that the certifier may have made an error? Clearly a dissatisfied party must do more than simply show an error by the certifier – otherwise what is the point of the “final and binding” wording?

Menolly’s main argument was that the certifier had gone outside the scope of its authority. It relied on an earlier Court of Appeal decision, which said that someone who is to make a final and binding decision in accordance with certain principles could be open to challenge if he has taken what the court decides is a legally incorrect view of what those principles are.

The share sale agreement said the certificate counted as conclusive evidence that practical completion had been reached. The only exception was in the case of error or fraud

In this case, said the judge, the certifier had formed the view that the contractor did not need to provide disabled access as part of its obligations under the building contract. The judge, having examined the contract documents, decided that this was wrong. And that, he concluded, was fatal to the certificate.

I should repeat that this decision is significant only in those cases where PC certificates (or perhaps other types of certificate) are final and binding, and that this is not the case with most standard forms. Nevertheless, the reasoning could apply to forms such as the IChemE contracts where certain technical disputes are decided by an independent expert, as well as to some PFI contracts and bespoke forms.

This case potentially paves the way for the argument that, even if the words “final and binding” are present in a contract, a certifier’s decision is nonetheless open to challenge in court, if it can be shown that it was founded on an incorrect legal view about a term of the contract.

Is this a good thing? Arguments about completion frequently revolve around what the contract says about scope of works, as well as around issues of quality of work. Yet, in giving someone power to make a final decision, parties often want the matter to end there. It would be unfortunate if lawyers now felt obliged to draft ever longer clauses to make it clear that “final” means just that.

In this case, although Menolly succeeded in showing that the certificate was invalid, the judge held that it had acted in such a way as to lead Cerep and the certifier to think that level access was not a bar to PC. So Cerep had the last laugh.