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.

SEPTEMBER 2013
SEOUL OFFICE

Table of Contents
1. COMPLETION

2. Contacts

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;

RELATED LINKS
>

Herbert Smith Freehills

>

Our construction and engineering

disputes practice

>

Our Seoul office

(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
1
described as being finished, but not absolutely perfect. As the Judge in Emson v EME Developments 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

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

es/17544280_1

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
2

Clause 39(b) of the I.E.M Conditions of Contract for Works 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
3
contracts. In short, 'practical completion' can be said to have occurred:

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

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

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

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
7

The Red Book (1999 edn.), permits the Contractor to apply for the Engineer to issue a Taking over Certificate when the Works
8
are complete and ready for taking over. 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
9
items to the punch list) on the ground that they could have been, but were not, raised in rejecting the first request.
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
10
(2011). Under this contract the Contractor can apply for a Certificate of Substantial Completion when the works have been

2
3

4
5
6
7
8
9

produced by the Institute of Engineers, Malaysia.

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.
P & M Kaye Ltd v Hosier & Dickinson Ltd [1972] 1 WLR 146 at 165 (per Lord Diplock).
HW Nevill (Sunblest) Ltd v William Press & Son Ltd (1981) 20 BLR 78 at 87 (per Judge Newey QC).
Westminster Corp v Jarvis and Sons [1970] 1 WLR 637 at 646 (per Viscount Dilhorne).
See also cl 10.1 of the FIDIC MDB, Silver and Yellow Books.
cl.10.1.
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.

es/17544280_1

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
11

The NEC3 contract 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
12
Date and has corrected notified Defects which would have prevented the Employer using the works".
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.

3.

10
11
12

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.

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).

Formerly the ICE Conditions of Contract.

New Engineering Contract, Engineering and Construction (3rd edn.).
See cl.11.2(2)

es/17544280_1

2. Contacts
Tony Dymond Partner

Lewis McDonald Partner

T +82 2 6321 5700

tony.dymond@hsf.com

T +82 2 6321 5711

lewis.mcdonald@hsf.com

Mark Lloyd-Williams Partner

Thomas Walsh Senior associate

T ++44 20 7466 2375

mark.lloydwilliams@hsf.com

T +82 2 6321 5701

thomas.walsh@hsf.com

Dana Kim Associate

Tom Marshall Associate

T +82 2 6321 5702

dana.kim@hsf.com

T +82 2 6321 5712

tom.marshall@hsf.com

To ensure that you continue to receive this newsletter, please let us know if you change your contact details (email new details to
Hyunsoo.Kim@hsf.com).
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 SeoulNewsletter@hsf.com.
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.

Back to top

es/17544280_1

es/17544280_1