12 June, 2014

Obtaining a certificate of practical completion (CPC) might feel like the end of a long journey, especially if there have been disputes along the way. But the question of just when practical completion has been reached is sometimes subject to argument, even if an independent party tasked with issuing the CPC has seemingly done this. The Supreme Court of Victoria in Metier3 Pty Ltd v Enwerd Pty Ltd & Anor [2014] VSC 80 recently conducted a preliminary trial to determine the question of whether under a deed of settlement a party was entitled to payment on the issuance of a CPC by a superintendent.

The Court’s decision is useful as it clearly distils the principles that apply when interpreting a commercial contract, and also gives examples of circumstances in which a Superintendent’s certificate of practical completion could be challenged and ultimately set aside.

Background

Enwerd Pty Limited (Enwerd) entered into an agreement with Metier3 Pty Ltd (Metier3) for Metier3 to provide architectural services in relation to the redevelopment of the St James Building in Melbourne (the Agreement and the Project).

During the Project the parties fell into dispute in relation to the fees charged by Metier3 for its work. Following negotiations, the parties agreed on the fees payable to Metier3 and entered into a deed of settlement recording how and when those agreed fees would be released (the Deed of Settlement).Relevantly, clause 2(e) of the Deed of Settlement set out when Metier3 would be entitled to the final instalment of AUD 300k. It read:

Payment by [Enwerd] of the last instalment of the Final Payment shall be subject to Practical Completion of the Works (including provision of all construction drawings and any other documents required under the agreement to be provided by [Metier3] in respect of the Project, upon, or immediately following Practical Completion)…

The Deed defined ‘Practical Completion’ as:

The issue of a Certificate of Practical Completion for the Works, or any relevant portion of the Works, in accordance with the contractual arrangements for performance of the Works.

The Superintendent’s representative issued a CPC for the Works on 1 March 2013. But Enwerd refused to pay the final instalment, insisting that the CPC had been issued prematurely (because not all of the work required to be done as a precondition to practical completion had been done) and, in any event, was ‘meaningless and ineffectual’ and the Superintendent had been terminated.

Metier3 sued, seeking payment of the final instalment.

Parties’ Submissions

Metier3 argued that the Deed of Settlement was unambiguous and simply entitled Metier3 to the final instalment when the CPC was issued under the Deed of Settlement. Metier3 argued that this milestone for payment was chosen to provide it with certainty about when it would be paid the final instalment and to prevent Enwerd from being able to withhold the final instalment until it decided for itself whether practical completion had been achieved. As the CPC had been issued, Metier3 argued it was therefore entitled to be paid the final instalment. 

On the other hand, Enwerd referred the Court to the extensive definition of ‘Practical Completion’ in the Agreement. Enwerd took the view that these criteria had to be satisfied before Practical Completion could be said to have been reached for the purposes of the Deed of Settlement. This argument was based on the fact that the Deed of Settlement’s definition of Practical Completion included the words ‘in accordance with the contractual arrangements for the performance of the Works’. Therefore, to be entitled to payment under the Deed of Settlement, Enwerd argued that Metier3 had to satisfy the Agreement’s definition of ‘Practical Completion’. 

Court Decision 

Principles Of Interpretation

Before looking at clause 2(e) of the Deed of Settlement, the Court considered the principles which apply to the interpretation of commercial contracts. The Court had regard to several recent cases, including the recent decision of the High Court of Australia in Woodside Energy Ltd v Electricity Generation Corporation [2014] HCA 7. It noted the continuing trend of courts to interpret contracts with an eye for commercial reality and common sense. The Court affirmed that in interpreting commercial agreements, the aim is to give effect to the contractual obligations that reasonable persons in the position of the parties would have intended to create. In particular, the Court noted, with reference to other cases:

• the interpretation of the contract must yield to business common sense;
• if the meaning of an agreement is ambiguous, the preferred interpretation is one which avoids consequences which are capricious, unreasonable, unjust or not consonant with business efficacy. ‘Business efficacy’ also involves economic considerations;
• a court may construe the obligations of a party ‘in accordance with that party’s reasonable business and operational considerations’; and
• if there could be more than one interpretation, the Court will consider the reasonableness of the interpretations. The more unreasonable a result, the less likely it is the parties intended it.

Application Of Those Principles

The Court held that the Deed of Settlement revealed that Metier3 was entitled to the final instalment once the Superintendent has issued a CPC in accordance with the terms of the Deed of Settlement.

Accordingly, the Court held that as the Superintendent had issued a CPC, Metier3 was entitled to payment of the final instalment unless Enwerd was able to prove that the CPC was not issued in accordance with the terms of the Deed of Settlement. The Court set out five general grounds which could possibly be relied on to support an argument that the CPC should be set aside:

• the document relied upon as a CPC was not a CPC, or was not issued by the Superintendent;
• the Superintendent did not exercise the contractual power bona fide e.g. the Superintendent was not genuinely of the opinion that Practical Completion had been reached;
• the decision to issue the CPC was so unreasonable that no superintendent in their position would ever consider issuing it, or the decision is arbitrary or capricious; 
• the issue of the CPC is beyond the contractual power of the superintendent; or
• the exercise of the power is liable to be set aside, e.g. due to unconscionable conduct.

The Court noted that the role of a superintendent is to administer, and to promote the aim of, the contract. The five general grounds identified above are examples of how a superintendent might fail to perform that role.

Accordingly, the effect of this decision was that Enwerd was required to prove that the CPC should be set aside. 

Following this decision, Metier3 sought summary judgment for payment of the final instalment based on the Court’s decision that it was entitled to payment on the issue of a CPC. The Court dismissed the application, finding that it was necessary to determine the factual and legal matters regarding whether the CPC had been validly issued. 

What This Decision Means For You

The decision is useful in that it crisply distils the principles applicable to the interpretation of commercial contracts. In doing so, parties are reminded of the approach the courts will take when tackling how to interpret a commercial agreement.

Further, this case demonstrates how easily practical completion can become a potential source of disagreement. While certification of practical completion by an independent third party, such as a superintendent, should give the parties some comfort that a proper assessment has been made, there will always be the potential for argument about whether it should have been issued in the first place.

This makes it all the more important to ensure that the superintendent, or other party charged with certifying practical completion, is and remains independent, understands the correct process for certifying practical completion, and arrives at a robust, defensible assessment. This is particularly true if practical completion is being used as a trigger for payment.

For further information, please contact:

Elisabeth Maryanov, Herbert Smith Freehills
[email protected]

Michael Lake, Herbert Smith Freehills
[email protected] 

Matthew Cobb-Clark, Herbert Smith Freehills
[email protected]

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