July 2005

October 2005

Temporary disconformity in construction and engineering contracts

by Ellis Baker and Anthony Lavers
Ellis Baker is a Partner and Head of the Construction & Engineering Practice Group, White & Case, London. Anthony Lavers is a Professional Support Lawyer, Construction & Engineering Practice Group, White & Case, London and Visiting Professor of Law, Oxford Brookes University. This article is based upon a presentation by the authors on 5 April 2005 to the Society of Construction Law at a meeting in London chaired by Dr. Robert Gaitskell QC.

Introduction
This paper considers situations, which will be dened further below, where, during the currency of a project, the works do not comply with the contract requirements and the legal consequences owing from that, specically the question as to whether the owner is entitled to a remedy against the contractor1. The authors undertook to address this difcult issue because they had come across it in practice and found the (very limited) guidance provided by commentators and judges at best uncertain and at worst actually contradictory. It is not claimed that all uncertainties and contradictions are resolved, which would require major appellate authority, but it is suggested that sense can be made of the subject and the authorities and that this paper represents a tenable approach. The members of the audience at the presentation on 5 April, who raised several challenging questions2, were kind enough to say that this promotion of discussion of the subject was worthwhile and it is offered in that spirit, rather than as a comprehensive solution.

The issue
The temporary disconformity issue in English law can be reduced in essence to the question as to whether a contractor whose work has not, at a given time, met the requirements of the contract can be said to be in breach of contract, giving the owner remedies prior to completion.

A range of views
Lord Diplocks dissenting speech in Kaye Ltd v Hosier & Dickinson Ltd.3 is generally regarded as the beginning and the high point of the concept of temporary disconformity. It is also likely to be the one for which many contractors would wish to contend. His view can be summarised in the following sentence from his speech4: Provided that the contractor puts it right timeously I do not think that the parties intended that any temporary disconformity should of itself amount to a breach of contract by the contractor. However, this view has been attacked frequently in the thirty years since it was given by those representing owners, by commentators and by judges. A avour of what might be called the opposite end of the spectrum of opinion can be obtained from Lintest Builders Ltd v Roberts 5 and from Hudson6.

Roskill LJ in Lintest emphasised that Lord Diplocks speech was a dissenting one and questioned7 whether his Lordship on any view intended it to be of universal application (of which more below). He preferred the view that the building owner acquired a right at the time the defective work was done. The view in Hudson may go even further; it is certainly more trenchantly expressed8: It is submitted that, on grounds of both principle and practicality, a contractor will be in immediate breach of contract whenever his work fails to comply with the Contract descriptions or requirements. While it might be objected that one formulation may not t every situation, these views, taken as they stand, appear irreconcilable, or at least inconsistent. To test whether these, or any other, formulations could serve as a comprehensive statement of the legal position, it was decided to create a set of scenarios to which they could be applied.

Applying the range of views to the Scenarios

Applying rst the Hudson formulation; a contractor will be in immediate breach of contract whenever his work fails to comply with the contract descriptions or requirements (emphasis supplied). Taken at face value, this would include not only Scenario C, but Scenario B and also Scenario A. This formulation appears, deliberately or not, to embrace mere incompleteness, although to classify Scenario A as a breach of contract even attracting nominal damages would be absurd. It might be argued, and contractors no doubt would argue, that giving any legal remedy (e.g. damages or the right to terminate in the case of Scenario B, other than the right to have defects rectied in time, would be very unfair, if not unworkable. Scenario C, by contrast, is neither incomplete, nor merely a case of defective workmanship; it is fundamentally wrong and cannot be brought up to the contract specication by completing that which is incomplete or rectifying defects in the work. Table A shows the outcome of applying the immediate breach of contract formulation in its most extreme version to the Scenarios. Table A: Immediate breach of contract Scenario A Scenario B Scenario C The painter interrupted The unskilled workforce The design ignored Breach Breach Breach Doesnt make sense Harsh to contractor? Makes sense

The Scenarios
The Scenarios are stylised factual situations adapted to illustrate the applications of different views of temporary disconformity. Scenario A. The painter interrupted. In a construction contract, the specication calls for six coats of paint to be applied to particular surfaces, with a minimum of 24 hours for drying and preparation between each coat. After ten days of a six week contract, only two coats have been applied. At this point, it is an example of incomplete work. It does not meet the standard required by the contract, although it is not defective, in the sense that the work done if continued, will be compliant. Scenario B. The unskilled workforce. In a contract for construction of condominium apartments, the specication calls for the tting and sealing of a waterproof membrane and tiling on the roof terraces. During the rst two months of a six month contract, the contractors employees have applied the sealant inconsistently to the sheets of membrane and have tted the tiles unevenly. This is an example of defective work. It does not meet the standard required by the contract and is defective in the sense that the work done if continued, will be non-complaint. Scenario C. The design ignored. The foundation design calls for the whole building a re station to be supported on piles, because of the difcult geological conditions of the site. After two months of a ten month contract, the contractor has adopted a oor on earth foundation design and built main walls on granular ll and partition walls suspended from the main walls. The structure will not be capable of bearing its design load. This should be regarded as a fundamental defect; a distinction will be drawn in the analysis below between this and the defective workmanship in Scenario B.

The Diplock formulation applied to the Scenarios produces very different results, as appear from Table B: provided the contractor gets it right by the time of completion, no temporary disconformity should amount to a breach, and even the award of nominal damages would indicate a legalistic analysis which does not make business sense. This undoubtedly covers Scenario A and there can hardly be a sensible objection to the contractor being given the time agreed to bring the works to completion. This analysis really treats Scenario B in the same way, so that defective work is to be regarded as equivalent to incompleteness, to be put right before the completion date. This is not uncontroversial and may be a source of objection to owners, although it is how contractors would normally view it. The real difculty is how far the Diplock formulation can be stretched to accommodate Scenario Ctype facts If it were just a case of timeousness, there may well be time for the contractor to demolish a structure which cannot function because the design has been ignored, and rebuild it. On the Diplock formulation, that would deprive the owner of a remedy at the point where the useless structure was, for instance, about to be demolished. The outcomes of applying the Diplock formulation to the Scenarios can be seen in Table B.

Table B: Temporary disconformity should not amount to breach of contract Scenario A Scenario B Scenario C The painter interrupted The unskilled workforce The design ignored No breach No breach No breach Makes sense Generous to contractor? Doesnt make sense

Mocatta J held that the defects were a default and distinguished the Diplock formulation on two grounds. First, unlike the situation in Kaye v Hosier & Dickinson, the defects had not been corrected at the time of the termination. Second, the express terms of the Contract, which obliged the Contractor to carry out and complete the work, could not be construed as a single obligation but as two separate obligations to carry out and to complete the work respectively. This is referred to in Hudson as the dual obligation; logically, it should not be necessary, or not always, to wait until completion to ascertain if the work is being carried out. The learned Editors of the Building Law Reports10 give their opinion as that the dual nature of the obligation is a further reason to treat Lord Diplocks analysis with caution. But the Nene case was only an early example of the courts nding ways to avoid applying the Diplock version of the temporary disconformity principle. Others laid emphasis upon the presence in the contract of express obligations upon the contractor to remedy defects. Such provisions are routinely found in the main standard forms, as well as in bespoke contracts. In the JCT form, Clause 8.4 gives power to the Architect/Contract Administrator to issue instructions If any work, materials or goods are not in accordance with this Contract. ICE 7th Edition Clause 39(1) gives the Engineer power during the progress of the Works to instruct removal of unsatisfactory work and materials which in the opinion of the Engineer are not in accordance with the Contract. The courts have found the breach of the Contractors obligation to comply with such an instruction to constitute a crucial point of distinction from Lord Diplock. In William Tomkinson and Sons Ltd v The Parochial Church Council of St. Michael,11 the owner instructed the contractor to rectify defects under the provisions of the (JCT Minor Works) contract. The contractor failed to do so. HH Judge Stannard held that the employer was entitled to the cost of rectifying the defects. While not central to the subject of this paper, it is perhaps surprising to note that the costs were held to be assessed by reference to the cost which the contractor would have incurred in remedying the defects, rather than the cost which the employer would have incurred in engaging another contractor to do the work. The Tomkinson case can be regarded as fairly straightforward, because instructions had been given and the defective work had not been corrected. The Lintest Builders case, by contrast, could not have been dealt with in this way, since no instruction had been given. The contractor had terminated the contract for non-payment. The issue before the Court of Appeal was whether the arbitrator, in determining the amount due to the contractor, was entitled to take into account the reasonable cost of rectifying defective work which existed at the time of termination. Despite the absence of an instruction to rectify, the Court of Appeal decided that the owner had an existing right that the defective work should be corrected and that the arbitrator was entitled to
3

Neither the Hudson formulation nor the Diplock formulation, at least as they stand, leads to satisfactory results when applied to the Scenarios. Tables A and B reveal at least one very unattractive outcome for each party and a further one which would be controversial. However, it must be emphasised that these are only notional positions, adopted as representing opposite ends of a range of possible opinions as to what the law should be. It is therefore desirable next to try to ascertain the position in English law as it currently stands.

The position in English law

As has been mentioned already, Lord Diplocks was a dissenting voice in Kaye v Hosier & Dickinson. English judges since have not been notably receptive to Lord Diplocks view on temporary disconformity; indeed, there is no English case in which it has not been distinguished, or even doubted. Roskill LJs approach to the Diplock formulation in Lintest Builders v Roberts is classic in this respect, emphasising both that it was made by way of dissent and that it was doubtful whether his Lordship on any view intended it to be of universal application. More specically, the English courts have sought to avoid applying the Diplock version of temporary disconformity in one of three ways. First, that on the case before the court, and unlike that before the House of Lords, the defects were not corrected at the relevant time. Second, that the principle is inconsistent with another contractual obligation. Third, that the defects are too numerous or too serious to be treated as a temporary disconformity. The rst two of these grounds of distinction are illustrated by the decision of Mocatta J in Nene Housing Society v National Westminster Bank 9. In that case, there was automatic termination of the contract for contractor insolvency and the issue for the court was whether defects in the work which existed at the time of the termination were a default justifying the owners call on the surety bond.

take into account the cost of doing so. As Roskill LJ put it, The Architect could take action (under the contract). The fact that the Architect had not done so at the time when the Contractor properly determined this contract does not in my judgment deprive the building owner of the rights which accrued when the defective work was done. The Lintest case is of signicance, too, because of the attempt by John Uff, as counsel, to advance and indeed develop the Diplock formulation. His argument was that There was no accrued right merely because defective work had been done a builder in those circumstances can do defective work as often and as long and frequently as he liked provided that by the time the contract comes to an end and the defects period comes to an end he had remedied those defects. If successful, that argument would have established the Diplock formulation as the law on temporary disconformity. Roskill LJs reaction, however, dispelled this prospect12: I confess I nd that submission rather surprising with respect, I do not think that is correct. Nicholas Dennys QC also sought to rely on Lord Diplocks words in Guinness plc v CMD Property Developments Ltd 13 and with a similar result. Mr Dennys contended for a distinction between cases where rectication of the defect was required and those where there was no request: It is only failure to comply with such instructions that can give rise to a claim for the cost of having the work carried out by an alternative contractor. HH Judge Havery rejected this version of the Diplock formulation, applying both Lintest and Tomkinson. (See in particular on this point the comment by Roskill LJ in Lintest quoted above). The third ground of distinction was that the defects in question fall outside the concept of a temporary disconformity. This could be because they are too numerous/too frequent or because they are too serious. As has been seen, the attempt in Lintest to persuade the Court of Appeal that a contractor can do defective work as often and as long as frequently as he liked received summary treatment. The concept of a contractors work containing sufciently numerous defects to warrant the grant of an immediate remedy was discussed in Rice v Great Yarmouth Borough Council 14, where the Court of Appeal, dealing with the alleged repudiatory breach of a maintenance contract remarked on the parallels with building contracts, in the number and variety of the obligations involved and the varying gravity of the breaches which may be committed, some of which may be remediable and some not. Although in the circumstances the Councils appeal failed, Lady Justice Hale held that The judge was right to ask himself whether the cumulative breaches would continue to deliver a substandard performance. The Court referred on this point to a decision of HH Judge William Stabb in Sutcliffe v Chippendale and Edmundson15 as to whether an owner was justied in terminating a contractors employment: the quality of the work was deteriorating and the number of defects was multiplying, many of which (the architect) had tried unsuccessfully to have put right the contractors had neither the ability, competence or the will by this time to complete the work in the manner required by the contract. (emphasis supplied)
4

The defect may, also, be too serious to be treated as a temporary disconformity, even though it is neither numerous nor frequent. The argument had again been deployed in Surrey Heath Borough Council v Lovell Construction Ltd 16, where a building had been largely destroyed by re: if, say Lovell, those principal obligations (completing work in accordance with the design and on time) are satised, it matters not that en route the contractor may have been temporarily negligent or in breach of contract. HH Judge Fox-Andrews offered the wryly dismissive comment that the expression temporary disconformity does not immediately appear apt to describe a destruction of a building by re when nearing completion. The question, then, must arise as to whether it is possible to produce an account of the law of temporary disconformity which can accommodate both the Diplock formulation and the English cases in which it has been distinguished, namely Lintest, Tomkinson, Guinness and Surrey Heath. The authors suggest that it is, but that the key is to be found in other jurisdictions, where the concept of temporary disconformity has been more readily applied.

Assistance from foreign jurisdictions

The New Zealand case of Adkin v Brown17 involved what the court described as an almost unbelievably protracted saga involving a residential building contract. The employer had terminated the contract on account of defective work and the issue was whether the contractor had been in breach, so as to entitle him to do so. The New Zealand Court of Appeal18 approved the approach of the rst instance judge: ORegan J agreed that it was not open to Mr Adkin to terminate for breach of an essential stipulation as to structural safety because it was still possible that Mr Brown would perform the remedial work identied by the expert so as to produce a structurally safe building Cancellation based on an implied term that the building would be structurally safe or on alleged breach of the obligation of the builder properly to complete the works was premature. The defects could still have been remedied. The New Zealand Court of Appeal was prepared to accept the view prevalent in the English cases that there will be situations where the defects in question cannot be categorised as a temporary disconformity; but equally important is the fact that they regarded the defects in the case before them as precisely that: It does not seem to us that the High Court Judge was denying the possibility that it might have been an essential breach to leave the building in an unsafe condition at the end of construction. The fact that the buildings defects in that regard could be remedied and that it could be completed for such a relatively small sum (even by the values of 1981) rather speaks for itself. It may be that in another case it could be shown that a failure to meet such a structural safety requirement during construction could give rise to a right of cancellation on the part of the owner. It was held not to be so in this case and, we think, understandably so.

The Courts signicant conclusion was that this decision was not in disharmony with the so-called temporary disconformity theory. The second instructive overseas application is provided by the decision of the Hong Kong High Court19 in Eu Asia Engineering Ltd v Wing Hong Contractors Ltd 20. This was a dispute between a main contractor and a subcontractor concerning defects in concrete work, principally honeycombing in the ooring and bulging at the joints. Kaplan J, faced with a citation of the Diplock formulation from Kaye v Hosier & Dickinson, found the case to be a straightforward application of temporary disconformity: Honeycombing is a frequent occurrence. I accept that it has to be put right. It has to be put right before nishes are applied to the walls. I am quite satised that if there was any honeycombing, Eu Asia would have made it good in the normal course of the work. To suggest that it could give rise either to termination or to an allegation that it prevented a oor from being completed is quite unreal. Kaplan J actually applied the Diplock formulation expressly to the matter of bulging at the concrete joints: Such defects are commonplace and will in the normal course of events be remedied before nishes are applied. In my judgment, these defects come within Lord Diplocks above observations.

The authors argue that this is the key to an understanding of temporary disconformity and to an approach which both works and is consistent with judicial pronouncements. The starting point is the words of Lord Diplock himself: Provided that the contractor puts it right timeously I do not think that the parties intended that any temporary disconformity should of itself amount to a breach of contract by the contractor (emphasis supplied). The clear implication was that if the defect could not be put right timeously by the contractor it could, of itself, amount to breach of contract. This principle was helpfully developed in Eu Asia and in Adkin v Brown. In Eu Asia, Kaplan J thought that defects which in the normal course of events would be remedied by the contractor before completion would fall within the scope of a temporary disconformity. It would follow in such a case that the employer would not be entitled to terminate. Similarly, in Adkin v Brown the court referred expressly to the issue as to whether the defects could be remedied (and, if so, at what cost) in the context of a purported termination. In both Eu Asia and Adkin v Brown, it was held that the defects were remediable and so should be classied as temporary disconformities. There is nothing in either case to suggest that irremediable defects should be treated as temporary disconformities, indeed, the New Zealand Court of Appeal expressly referred to defects which would not be treated in this way. Irremediability could derive from two basic sources. Either the nature of the defect itself is such that the contractor cannot rectify it at all or in time, or the defects, while not necessarily individually of great signicance are too numerous to be remedied in time. In either case, an irremediable defect cannot be covered by the temporary disconformity theory. The disconformity is not temporary; it will remain at the time of completion come what may. The breach then takes place at the point in the project where this state of affairs occurs and not at completion, as would otherwise be the case. The effects can be tested by reference to the Scenarios put forward in the early part of this paper.

The position now and looking forward

The starting point for any principle of temporary disconformity is that it cannot be viewed in isolation from the remedy sought and the provisions of the contract. Pressure comes from the requirement, in certain circumstances, of a remedy prior to completion. As the BLR Editors, put it21 in their commentary on the Guinness case, the owner has need of some immediate rights it is unlikely to be the common law, or business sense that in such cases the employer has to await practical completion before the usual remedies for breach of contract are available to him. The owner will, under any normal contractual arrangement, have two main remedies i) to terminate the contract for contractor breach and ii) to recover rectication costs for breach by the contractor of an express obligation to rectify the work during the construction period. The question then arises as to what defects will i) give rise to the right to termination of the contract during the construction period or ii) entitle the employer to instruct the contractor to rectify a defect and recover rectication costs if this is not done. While i) and ii) are different in one key respect, namely, that usually only a very serious breach would give rise to an entitlement to terminate, the criterion for the availability of remedies is remediability.

Scenario A. The painter interrupted. If the painter is interrupted after ten days of a six week contract, with only two coats of paint applied, there is no breach of contract at all. The work is incomplete and this state of affairs is remediable in that it can and ordinarily will still be completed in time. It may be observed that it is most unlikely on these facts that the painting contractor is in breach of the carrying out limb of the dual obligation either. But if the facts of Scenario A are changed, so that after ve weeks and ve days of a six week contract only two coats have been applied, the contractor is already in breach at that point. Since the specication calls for 24 hours of drying and preparation time between coats, the position is irremediable. Scenario B. The unskilled workforce. If the contractor can and normally would make good the defective workmanship of his employees during the remaining four months of the six month contract, the inconsistent application of the sealant and the uneven tiling should be regarded as temporary disconformities. Although incomplete work and defective workmanship as represented by Scenarios A and B are qualitatively different22, given remediability in each case the outcome is the same: no breach. When a time is reached at which the defects cannot be remedied before completion, a breach of contract occurs at that point, even though completion has not yet been reached. Again, the disconformity is not temporary because of its irremediability. Scenario C. The design ignored. The contractor in Scenario C has constructed defective foundations by ignoring the design. The temporary disconformity principle does not apply to this situation. The defect is not of a kind which is normally remedied as a matter of course during the project. Even if it were technically possible to demolish the half-built structure and start again with a chance of nishing within the time for completion, this is not the subject of routine remediation. The contractor has taken a wholly wrong track and is in breach at that point, almost certainly entitling the employer to terminate immediately. This view derives from the criterion of remediability, but is also supported by the authority of the Surrey Heath case.

Conclusion
Temporary disconformity does have a role to play in English law, although it cannot be as wide a principle as was unsuccessfully contended for by counsel in Lintest and in Guinness. The authorities, including Lord Diplocks speech, can be reconciled so as to make sense. The importance of the remediability concept can be seen from the overseas authorities. The application of the concept to the Scenarios illustrates that it is practical and realistic. Appropriate contract drafting will always be crucial in protection of the parties rights and remedies. However, it is not the owners sole protection. In certain circumstances, the owner can have a remedy without waiting for completion. But the contractor will also be protected in its right to correct routine defects or incompleteness without liability to pre-completion remedies. The temporary disconformity principle as it appears to the authors is capable of affording these protections to the respective parties. It will be for a future English appellate court to decide whether it should do so.

Endnotes
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

We refer throughout to contractors and owners for the sake of simplicity, although the same situation arises as between contractor and sub-contractor. The authors are grateful to all contributors and to Chairman Dr. Robert Gaitskell QC for a most stimulating and useful question session. [1972] 1 WLR 146. At p. 165. [1980] 13 BLR 38. Hudsons Building and Engineering Contracts (11th ed) by Ian Duncan Wallace QC, Sweet and Maxwell, London, 1995. At p.44. At p.700. [1980] 16 BLR 22. [1995] 76 BLR at p.46. [1990] 6 Con LJ 319. At p.44. [1995] 76 BLR 49. [2000] Times Law Reports 26 July. The authors are grateful for having this case drawn to their attention subsequent to their presentation. [1971] 18 BLR 157. [1988] 42 BLR 25. [2002] NZCA 59. Blanchard J delivered the sole judgement. Upheld on appeal by the Hong Kong Court of Appeal (CA No 29 of 1992) Unreported. [1990] Unreported, noted in Hong Kong Construction Law by JA McInnis, 1996, Butterworths, Hong Kong. p. 203. [1995] 76 BLR at p. 46. In the question and answer session, at the oral presentation of this paper, it was suggested that they are the same in any event. We see a signicant difference. An architect or engineer can instruct the correction of defective work, but cannot, (unless he has a power to order acceleration), compel the contractor to get on with incomplete work, while there is still time to complete it.

White & Case 5 Old Broad Street London EC2N 1DW United Kingdom Telephone: +44 20 7532 1000 Fax: +44 20 7532 1001
www.whitecase.com

White & Case 2005

White & Case LLP, a New York State registered limited liability partnership, is engaged in the practice of law directly and through entities compliant with regulations regarding the practice of law in the countries and jurisdictions in which we have ofces.

ALMATY ANKARA BANGKOK BEIJING BERLIN BRATSLAVIA BRUSSELS BUDAPEST DRESDEN DSSELDORF FRANKFURT HAMBURG HELSINKI HO CHI MINH CITY HONG KONG ISTANBUL JOHANNESBURG LONDON LOS ANGELES MEXICO CITY MIAMI MILAN MOSCOW MUMBAI NEW YORK PALO ALTO PARIS PRAGUE RIYADH ROME SAN FRANCISCO SO PAULO SHANGHAI SINGAPORE STOCKHOLM TOKYO WARSAW WASHINGTON DC

1005008

Worldwide. For Our Clients.