Background: the Problem of Defective Work

If, during the running of a construction project, the works do not comply with the contract requirements, the owner will wish to know what remedies, if any, are available against the contractor.

At a practical level, this is often dealt with by the supervising officer exercising powers given by the contract. Thus under Clause 7.5 of the FIDIC Red Book, the Engineer may reject by giving notice to the Contractor of any Plant, Materials or Workmanship which "is found to be defective or otherwise not in accordance with the contract." There are similar provisions in many other modern construction and engineering contracts, including the other FIDIC forms. The Contractor's obligation must then "promptly make good the defect and ensure that the rejected item complies with the Contract." This provides the solution in the many cases in which the contractor is willing and able to respond positively by complying with its obligation to make good and ensure compliance. When that willingness and/or ability is lacking, the owner (Employer in the FIDIC forms) needs to consider its position further; specifically, the remedies available to it.

At the completion date, the contract will usually provide for the payment of liquidated damages (Delay damages in Clause 8.7 of the Red Book) if the work has not been completed on time according to the contract. Outstanding work and defects have to be remedied by the Contractor at its expense (Red Book Clauses 11.1 and 11.2), failing which the Employer has a range of remedies available: termination; reduction in contract price; and having the work carried out by others at the Contractor's expense. (Red Book Clause 11.4).

However, the most difficult situation for the owner/employer arises when the contractor's work is clearly non-compliant but the employer has no belief that the contractor can or will remedy it. Faced with the unattractive prospect of waiting until the completion date is reached before the remedies referred to above are triggered, the employer will wish to know whether the option exists of terminating the contract immediately for breach by the contractor.

Temporary Disconformity

In English law, it is difficult to answer that question with certainty. Over the last thirty years, the concept of 'temporary disconformity' has been developed, supporting the view for which many contractors would wish to argue. The concept has developed from an oft cited passage of Lord Diplock's in the 1972 House of Lords decision P and M Kaye Ltd. v. Hosier & Dickinson Ltd. [1972] 1 WLR 146. Here Lord Diplock suggested that: "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." This passage formed part of a minority judgment in the case and other English judges have not been very receptive to arguments that Lord Diplock's statement creates any sort of binding legal principle. In Lintest Builders Ltd. v. Roberts [1980] 13 BLR 38, Lord Justice Roskill emphasised that Lord Diplock's statement came from a dissenting speech and doubted "whether his Lordship on any view intended it to be of universal application."

The English courts have tended to avoid application of the Diplock approach to temporary disconformity if, unlike the Kaye case, the defects had not been subsequently corrected and/or the approach would be inconsistent with express contractual provision. In Nene Housing Society v. National Westminster Bank [1980] 16 BLR 22 for example, the Court held that not only did the defects in question remain uncorrected, undermining the argument that the disconformity was 'temporary', but the express terms of the contract referred not merely to a duty of the contractor to complete the work but to an obligation to "carry out and complete the work."

The Nene decision notes two separate obligations: 'to carry out' and 'to complete' the work, sometimes referred to as the 'dual obligation'. In the FIDIC Red Book, Clause 4.1 describes the Contractor's general obligation to "design (to the extent specified in the Contract), execute and complete the Works in accordance with the Contract and with the Engineer's instructions." Logically, it should not be necessary, or not always, to wait for completion to ascertain if the work is being 'carried out' or 'executed'. As the editors of the Building Law Reports put it in their commentary on Guinness v. CMD Property Developments [1995] 76 BLR 44, "[t]he dual nature of the obligation is a further reason to treat Lord Diplock's analysis with caution." The court rejected the application of Lord Diplock's temporary disconformity principle in that case too.

The 'temporary disconformity' theory has faced judicial opposition on a further ground, namely that it would permit serious and extensive defective work to be unchallengeable so long as the contractor could argue that there was still time to do it all again. Professor John Uff QC had attempted to test the boundaries of this concept when he appeared as counsel in the Lintest case arguing 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 as frequently as he liked provided that by the time the contract comes to an end and the defects period comes to an end he has remedied those defects." Lord Justice Roskill's reaction to this challenging argument placed significant limits on the prospects of expansion of the temporary disconformity principle: "I confess I find that submission rather surprising ... with respect, I do not think that is correct."

The courts have on several occasions demonstrated that they regard the nature of some breaches as inconsistent with the temporary disconformity theory. In Sutcliffe v. Chippendale & Edmondson [1971] 18 BLR 157 for example, His Honour Judge William Stabb considered whether an owner was justified in terminating a contractor's employment, when:

"The quality of 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."

The defect may also be too serious to be treated as a temporary disconformity, even though it is neither numerous nor frequent. The Diplock temporary disconformity argument was again deployed in Surrey Health Borough Council v. Lovell Construction Ltd. [1988] 42 BLR 25, when a building in construction had been largely destroyed by fire. The contractor in that case argued that as long as its principal obligations (completing work in accordance with design and on time) had been satisfied, any alleged "temporary" breaches prior to completion date did not amount to breaches of contract. His Honour Judge Fox-Andrews rejected the idea and commented that "the expression 'temporary disconformity' does not immediately appear apt to describe a destruction of a building by fire when nearing completion."

Despite the criticism it has endured, the temporary disconformity concept in English law cannot be discounted entirely. A recent decision of the Court of Appeal, while not relying on it, revealed some sympathy with the rationale on which it is based. In Shawton Engineering Ltd. v. DGP International Ltd. [2006] BLR 1, the court noted that: "Where time is not of the essence and where the party said to be in breach by delay is nevertheless making an effort to perform the contract, it is intrinsically difficult for the other party to establish a fundamental breach."

If there is to be no concept of temporary disconformity, one must consider the other extreme observed by the late Ian Duncan Wallace QC (Hudson's Building and Engineering Contracts, 11th ed., 1995): "[A] contractor will be in immediate breach of contract whenever his work fails to comply with the contract descriptions or requirements." This position would appear to place virtually every contractor in breach of contract on every project since incomplete work will inevitably fail contract descriptions and requirements.

There is, it is submitted, a balance to be struck between: (i) the owner's need, in appropriate cases, for a remedy without waiting for completion of a project and (ii) a contractor's right to complete and correct work without being liable for pre-completion remedies.

Although English law has not managed to achieve a consistent view as to how the temporary disconformity theory might achieve this balance, it has been attempted in other common law jurisdictions, and it appears that case law from Hong Kong and New Zealand may be of assistance in seeing how the principle can operate.

Other Jurisdictions: Remediability

The New Zealand case of Adkin v. Brown [2002] NZCA 59 arose from 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; the issue was whether the contractor had been in breach, so as to entitle the employer to do so. The Court held that although there will be situations when the defects in question cannot be categorised as a temporary disconformity; in this case they could be. The Court noted:

"The fact that the building's defects ... could be remedied and that it could be completed for such a relatively small sum ... 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 New Zealand Court of Appeal's significant 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 Court in Eu Asia Engineering v. Wing Hong Construction (a 1990 case, upheld on appeal by the Hong Kong Court of Appeal CA No 29 of 1992, and discussed by JA McInnis in Hong Kong Construction Law, Butterworths Hong Kong looseleaf). This was a dispute between a main contractor and a subcontractor concerning defects in concrete work, principally honeycombing in the flooring and bulging at the joints. Judge Kaplan, faced with a citation of the Diplock approach from Kaye v. Hosier & Dickinson, found the case to be a straightforward application of temporary disconformity, stating:

"Honeycombing is a frequent occurrence. I accept that it has to be put right before finishes are applied to the walls. I am quite satisfied 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 floor from being completed is quite unreal."

Judge Kaplan applied the Diplock approach expressly to the matter of bulging at the concrete joints, stating that: "Such defects are commonplace and will in the normal course of events be remedied before finishes are applied ... these defects come within Lord Diplock's above observations."

Conclusions on Temporary Disconformity in Construction

The starting point for producing a workable position on temporary disconformity is that it cannot be viewed in isolation from the provisions of the contract and particularly from the remedy sought. This latter is crucial. The significance of the subject derives from the pressing need, in certain circumstances, of a remedy prior to completion of the construction project.

The owner will, under any normal contractual arrangement, have two main remedies for breach by the contractor of an express obligation to rectify the work during the construction period, namely: (i) to terminate the contract for contractor breach and (ii) to recover rectification costs. The questions then arise as to what defects give rise to a right of termination during construction or entitle the employer to require rectification or the cost of it in default.

In trying to answer these questions, it is submitted that a crucial concept underlying the case-law is remediability.

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 added).

The clear implication was that, if the defect could not be put right timeously by the contractor, it could, of itself, amount to a breach of contract. This principle was helpfully developed in Eu Asia in Hong Kong and in Adkin v. Brown in New Zealand. In Eu Asia, the court thought that defects which "in the normal course of events" (emphasis added) would be remedied by the contractor before completion, would fall within the scope of 'temporary disconformity'. It would follow that in such a case the employer would not be entitled to terminate. Similarly, in Adkin v. Brown the court expressly referred to the issue of 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 classed 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 in time (or at all), or the defects, while not necessarily individually of great significance, 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 completion of the project. The breach then takes place at the point in the project when this state of affairs occurs and not at completion, as would otherwise be the case.

Taking this approach, the idea of temporary disconformity does have a useful role to play in ascertaining when an owner's rights to remedies accrue. The importance of the remediability concept can be seen from the Hong Kong and New Zealand authorities, where it was used in a practical and realistic way.

Appropriate contract drafting will always be crucial in the protection of the parties' rights and remedies. However, the owner's protection cannot always wait until completion. In certain circumstances, the owner can have a remedy without waiting. In others, the contractor will be entitled to correct routine defects or incompleteness without being held liable for these anomalies prior to completion of the project.

Temporary disconformity, interpreted by reference to remediability, is capable of balancing these protections between the respective parties. English law, however, requires further decisions of the appellate courts to resolve current uncertainty.