Partial possession occurs when the employer takes possession of part of the works before the project has been fully completed. A number of recent court decisions have considered this issue.
In Impresa Castelli SPA v Cola Holdings Ltd, Impresa agreed to build a large four-star hotel in on behalf of Cola, the hotel proprietor. The main contract incorporated the 1981 version of the JCT Standard Form of Building Contract With Contractor’s Design. The contract provided that the works would be complete within 19 months from the date of possession.
A dispute arose between the parties principally in relation to delays that occurred in achieving practical completion and the date or dates on which practical completion was achieved and as a consequence Impresa claimed for additional loss and expense and Cola claimed for an entitlement for liquidated damages and delay.
It was clear to the parties that the completion date of February 1999 was not going to be met which resulted in them agreeing a new date for completion in May 1999 save that the bedrooms would be made available to Cola in March 1999. A new liquidated damages provision of £10,000 per day as opposed to the original rate of £5,000 per day as set out in the contract was also agreed.
Following the agreement, further difficulties with progress were encountered with the air conditioning, which meant that the May 1999 completion date was also not going to be met. As a consequence, the parties agreed a second variation agreement which recorded that access for Cola would be allowed to parts of the hotel to enable it to be fully operational by September 1999 despite certain works not being complete, including the air conditioning. In September 1999, parts of the hotel were handed over to Cola but Cola affirmed that such parts were not properly completed. Accordingly, a third variation agreement was concluded which provided for a new date for practical completion and a revised date for the imposition of delay damages.
Impresa defended Cola’s claim for liquidated damages by stating that it had achieved partial possession of the greater part of the works pursuant to the various variation agreements resulting in a reduced rate of liquidated damages per day being payable as provided for in the contract.
In deciding the case, the court had to consider whether partial possession had occurred under clause 17.1 of the contract, which provides for deemed practical completion when partial possession is taken, or whether Cola’s presence was merely "use or occupation" under clause 23.3.2 of the contract.
In the event, the court could not find anything in the variation agreements to suggest that partial possession had occurred. It said that although each variation agreement could have used the words ‘partial possession’ they had in fact instead used the word ‘access’ and that the natural conclusion from this was that it related to use and occupation as referred to in clause 23.3.2 of the contract and not partial possession under clause 17.1. As a result, Cola’s presence in the hotel did not amount to partial possession and therefore the agreed liquidated damages provision was enforceable.
Compare this with what happened in the case of Skanska Construction (Regions) Ltd v Anglo-Amsterdam Corporation Ltd. Here Skanska had agreed to construct a purpose-built office facility in . As in Castelli, the contract was a JCT Standard Form With Contractor’s Design.
Anglo-Amsterdam wrote to Skanska confirming that the proposed tenant for the building, ICL, would commence fitting-out works at the date of practical completion. ICL was then charged with responsibility for security once it entered into this non-exclusive possession and Skanska was allowed access to carry out work subject to making the necessary security and access arrangements with ICL.
Anglo-Amsterdam alleged that Skanska was late in the completion of the works and applied liquidated damages at the rate of £20,000 per week for a period of approximately nine weeks. Skanska for its part argued that the building had achieved practical completion on time or that alternatively partial possession of the works had taken place and that in consequence its liability to pay liquidated damages ceased because of the operation of clause 17.1 mentioned above. The matter went to arbitration.
Clause 16 of the contract had been amended and laid down a more stringent test for establishing practical completion than would have otherwise have been the case. It provided that practical completion would not be granted until the employer was "… satisfied that any unfinished works are very minimal and of a minor nature and not fundamental to the beneficial occupation of the building for its designed use as a purpose-built facility".
In two respects, the works were not complete. The air-conditioning system was not functioning and Skanska had failed to produce operating and maintenance manuals. On that basis, the arbitrator held that practical completion had not occurred under the test set out in the amended clause 16 and that Skanska was therefore liable to pay liquidated damages until practical completion was indeed achieved under that clause.
However, Skanska was unhappy with the arbitrator's decision and appealed it to the court. The court was also unhappy with the decision. It found that clause 17.1 could operate equally when possession had been taken of all parts of the works and was not limited to possession of only part or some parts of the works. Accordingly, it found that partial possession of the entirety of the works had in fact been taken as a result of Anglo Amsterdam agreeing to ICL commencing fit-out works. Consequently, Skanska was entitled to repayment of the liquidated damages that had already been deducted by Anglo-Amsterdam.
The moral from these cases is that if you are an employer it is much better to enter into occupation of a development under the "use and occupation" provision in clause 23.3.2 of the contract because that will not stop liquidated damages running. For a contractor, however, it is preferable that any such occupation is expressly stated to be under clause 17.1 of the contract because it will place a brake on a claim by the employer for liquidated damages from the date the occupation commenced.
As previously published in Construction News, Summer 2005
