Seoul Construction Briefing October 2013 d2

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CONSTRUCTION NEWSLETTER (NUMBER 2)

HERBERT SMITH FREEHILLS KOREAN CONSTRUCTION NEWSLETTER We produce a monthly Newsletter which is focused on the topics which are particularly relevant to our Korean clients and is also in both Korean and English.

We hope you find this issue of the Newsletter helpful and interesting. In this edition, we take a look at the meaning of "completion"; and practical tips for avoiding disputes over when completion could be said to have occurred.

1. COMPLETION One of the most significant milestones on a project occurs when the Employer accepts that the contract work is complete and ready for handover. This will usually trigger:

(1) The end of the Employer's ability to issue scope variations;

(2) The demobilisation of the Contractor from the site;

(3) Possession of the site being returned to the Employer;

(4) The end of the Contractor's liability for liquidated damages;

(5) The beginning of the Employer's liability for loss and damage to the works;

(6) The return of half of the retention monies to the Contractor; and

(7) The beginning of the defects liability period.

In addition to this, it may also trigger:

(8) Entitlements for those who have entered into off-take agreements with the Employer;

(9) Commencement (or increase, depending on the project finance arrangement in place) of certain payment obligations under the Employer's financing covenants.

Because of these implications, there can often be some tension between a Contractor and an Employer around when completion occurs.

What does completion mean?

Describing contract works as having reached completion suggests that the works have reached a stage where they can be described as being finished, but not absolutely perfect. As the Judge in Emson v EME Developments1 pointed out:

"building construction is not like the manufacture of goods in a factor. The size of the project, site conditions, use of many materials and employment of various types of operatives make it virtually impossible to achieve the same degree

1 Emson Eastern Limited (in receivership) v EME Developments Limited [1991] 55 BLR 114-123 (per His Honour Judge John Newey QC)

SEPTEMBER 2013

SEOUL OFFICE

Table of Contents 1. COMPLETION 1 2. Contacts 4

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disputes practice > Our Seoul office

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of perfection as can a manufacturer. It must be a rare building in which every screw and every brush of paint is absolutely correct".

As to defining 'completion', this will in most cases be extremely difficult to do with any precision. However, it is important that contracts contain as much guidance as to what needs to be done to achieve 'completion' so as to limit as far as possible any disputes between the parties as to whether it has been achieved.

Before we look at specific drafting points, we will first consider how the concept is addressed in the standard forms.

Completion in Standard Form Contracts

Given the significance of the event, it is surprising how little attention is given to completion, particularly in terms of setting out what has to happen for completion to occur, in the standard form contracts. The issue is further confused by the fact that the various standard forms use different terms for 'completion'.

I.E.M. and JCT - practical completion

Clause 39(b) of the I.E.M Conditions of Contract for Works2 requires the Engineer to certify that 'practical completion' has occurred (and issue the Certificate of Practical Completion under clause 45) once it is satisfied that the whole of the Works have reached practical completion according to the provisions of this Contract.

There is, however, no definition for 'practical completion' and no basis given in the Conditions upon which the Engineer with make his assessment as to whether the works are practically complete. Consequently, unless practical completion is defined in one of the contract schedules or other bespoke provisions of the contract, the Contractor cannot be certain that the Engineer will always agree with the Contractor's assessment that practical completion has occurred.

The English courts have provided some guidance as to what the term 'practical completion' means in relation to the JCT form of contracts.3 In short, 'practical completion' can be said to have occurred:

when the works are free of any patent defects in materials or workmanship;4

where there are only very minor, de minimis items of work left incomplete;5

when all the construction work that has to be done has been done;6

Clearly, each of these requires the works to have reached some level of conclusion, and there is a degree of tolerance for the works being less than perfect. However, there is still room for argument, for example as to when outstanding work might be considered to be 'de minimis'. Further, as can be seen from the third point above, it remains important to set out clearly in the contract what construction work has to be done for practical completion to occur.

FIDIC ready for taking over

The Red Book (1999 edn.),7 permits the Contractor to apply for the Engineer to issue a Taking over Certificate when the Works are complete and ready for taking over.8 The Works will be ready for taking over when they are completed in accordance with the Contract, except for any minor outstanding work and defects which will not substantially affect the use of the Worksfor their intended purpose.

In making an assessment of whether the Works have reached this standard, the Engineer must, within 28 days of the Contractors application, accept the application or reject it. Where the application is rejected, the Engineer must give reasons and specify the work that the Contractor is required to perform commonly on a list described as a punch or snagging list before the certificate can be issued.

While this process provides some certainty to the Contractor, once a punch list has been issued by the Engineer with a notice to reject the application, there does not appear to be anything to prevent the Engineer from raising new issues (i.e. adding new items to the punch list) on the ground that they could have been, but were not, raised in rejecting the first request.9

ICC substantial completion

A similar process to the one stated in the FIDIC contracts is contained in cl.48 of the ICC Measurement Version Contract (2011).10 Under this contract the Contractor can apply for a Certificate of Substantial Completion when the works have been

2 produced by the Institute of Engineers, Malaysia. 3 JCT Joint Contracts Tribunal produce a number of Contract Forms for construction works. In the current JCT suite of contracts, only the

Major Project Construction Contract form contains a definition of practical completion. 4 P & M Kaye Ltd v Hosier & Dickinson Ltd [1972] 1 WLR 146 at 165 (per Lord Diplock). 5 HW Nevill (Sunblest) Ltd v William Press & Son Ltd (1981) 20 BLR 78 at 87 (per Judge Newey QC). 6 Westminster Corp v Jarvis and Sons [1970] 1 WLR 637 at 646 (per Viscount Dilhorne). 7 See also cl 10.1 of the FIDIC MDB, Silver and Yellow Books. 8 cl.10.1. 9 While there may be a number of arguments that a Contractor could raise to resist liquidated damages from accruing in circumstances of this

kind, these are beyond the scope of the current discussion.

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substantially completed and passed any final tests that may be prescribed by the Contract. Unlike the FIDIC contracts, however, if the requested certificate is not issued in response to the Contractors notice, the Engineer must give instructions to the Contractor detailing all of the work to be done before the certificate will be issued. The Contractor is entitled to be issued the certificate within 21 days of those instructions having been completed.

NEC3 - completion

The NEC3 contract11 goes further than the forms discussed above by defining 'Completion' as being "the date, decided by the Project Manager, when the Contractor has done all the work which the Works Information states he is to do by the Completion Date and has corrected notified Defects which would have prevented the Employer using the works".12

The contract does not require the works to be perfect; certain defects can be rectified after Completion so long as they do not affect the Employer's use of the works.

The level of detail contained in the Works Information will be key to achieving certainty as to when completion can occur: this should detail exactly what needs to be done for completion, including for example passing specified tests, submitting the operating manuals and preliminary as-built drawings and the like.

Practical tips for avoiding disputes over when 'completion' could be said to have occurred

Taking the following practical steps can remove a lot of uncertainty around the issue of completion:

1. In drafting the contract, make sure that conditions precedent to completion are clearly stated. The parties should take time at the negotiation and drafting stage to set out in as much detail as possible in light of the specific circumstances of the project what work needs to be completed to achieve completion. Issues such as the following should be considered:

a. Exactly what work needs to be finished before completion can occur?

b. Does this include tests, minor outstanding items and defects?

c. If not, specify what will be permissible (e.g. minor outstanding works or defects that will not affect the Employer's use of the works, or whether some tests can be carried out after the Employer has taken over and is using the work)

d. When will the outstanding tests, items of work and defects be made good, and what happens if they are not?

Of course, these issues will intersect with other provisions of the Contract and must be considered conjunction with the Contractors other obligations under the Contract.

2. Ensure that the contract contains a clear procedure for certifying completion, including: a. Identify who will decide whether completion has occurred;

b. What notices the parties are required to provide (e.g. a notice from the Contractor stating that it considers the works to be complete, a notice from the Engineer agreeing with the Contractor's position or disagreeing with reasons);

c. Where appropriate, a procedure for remedying any minor outstanding works/defects after completion has been certified; and

d. How disputes over completion are to be resolved.

3. Keep in regular communication with the person who will be certifying completion. Communication between the Contractor and the Engineer/Employer around the time of completion is key:

a. The Contractor can better understand the approach that the Engineer/Employer will take in assessing any application for completion under the Contract; and

b. The Contractor can gain advance notice of likely issues of contention and attend to those as a priority to avoid delaying the completion of the project (and therefore incurring a liability for liquidated damages).

10 Formerly the ICE Conditions of Contract. 11 New Engineering Contract, Engineering and Construction (3rd edn.). 12 See cl.11.2(2)

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2. Contacts

Tony Dymond Partner T +82 2 6321 5700 [email protected]

Lewis McDonald Partner T +82 2 6321 5711 [email protected]

Mark Lloyd-Williams Partner T ++44 20 7466 2375 [email protected]

Thomas Walsh Senior associate T +82 2 6321 5701 [email protected]

Dana Kim Associate T +82 2 6321 5702 [email protected]

Tom Marshall Associate T +82 2 6321 5712 [email protected]

To ensure that you continue to receive this newsletter, please let us know if you change your contact details (email new details to [email protected]). To unsubscribe, click here. Should you wish to discuss any of the issues outlined in this newsletter, or any other legal issues that may be relevant to your business, please do not hesitate to contact [email protected]. Herbert Smith Freehills LLP 2013 The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein.

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CONSTRUCTION NEWSLETTER(NUMBER 2)1. COMPLETIONWhat does completion mean?Completion in Standard Form ContractsPractical tips for avoiding disputes over when 'completion' could be said to have occurred

2. Contacts

Documents

Seoul Construction Briefing October 2013 d2