Defining due diligence

The obligation for a contractor to complete its works “regularly and diligently” or with “due diligence” is a common one in construction and engineering contracts. A recent case before Mr Justice Stuart-Smith in the Technology and Construction Court (TCC) provided further guidance.

The case concerned the construction of a polyethylene plant at its site at Wilton on Teesside by the claimant, Sabic UK Petrochemicals Ltd (Sabic). Sabic had appointed Simon Carves Ltd (SCL) as the contractor. Punj Lloyd Ltd (PLL) was SCL’s parent and was the defendant in the proceedings – SCL had gone into administration in 2011.

Under the contract, SCL was “with due diligence”, to carry out and complete the works. There was also an express right for Sabic to terminate the contract in the event SCL was not proceeding with due diligence.

While the works were originally due to be completed by the end of 2007, the parties had agreed that the date for completion be extended to 5 December 2008. However, there were further delays. Following a warning given on 3 October 2008, Sabic terminated the contract on 3 November 2008 and relied on SCL’s failure to proceed with due diligence as one reason entitling it to do so.

PLL submitted that delay is not necessarily the result of a lack of due diligence

PLL denied that SCL had failed to proceed with the works with due diligence. One of the main issues in dispute between the parties was therefore the scope and extent of the obligation to carry out the works with due diligence.

Sabic submitted that the obligation of due diligence must be assessed by reference to SCL’s obligations under the contract, including the committment to achieve completion by 5 December. Sabic said that a failure to make the progress necessary to achieve the contractual requirement of 5 December 2008 evidenced a lack of due diligence.

PLL disagreed. PLL submitted that the obligation of due diligence should be assessed by what is feasible at the time it is being assessed. PLL contended that as, during the warning period in October 2008, neither party considered the contractual completion date as feasible, SCL’s obligation of due diligence should be assessed by reference to a completion date in February or early March 2009. PLL also submitted that delay is not necessarily the result of a lack of due diligence.

The judge held that it was clear that the exercising of due diligence was to be directed to the discharging of the contractual obligations relating to the carrying out of the works. As the period with which the case was concerned fell before the contractual completion date of 5 December 2008, it followed that the contractual object to which the obligation of due diligence was directed included achieving completion on that date.

In seeking to deflect this conclusion, PLL put forward two other arguments. First, that an obligation to use due diligence did not require SCL to achieve the impossible. Second, the obligation of due diligence did not require SCL to undertake accelerative measures.

The judge agreed that the obligation to use due diligence does not give rise to an absolute obligation to achieve the completion date. He considered that SCL were under two separate obligations (a) to achieve completion on 5 December 2008 and (b) to exercise due diligence in pursuing that objective. A failure to achieve completion on 5 December 2008 would amount to a breach of the first obligation but not necessarily the second. However, the judge refused to accept that the mere fact that an absolute obligation is or has become impossible to achieve renders that contractual obligation irrelevant when considering the separate obligation to exercise due diligence.

The judge held that circumstances may arise where the exercising of due diligence may require the taking of measures that were not originally contemplated in order to achieve or come as close as possible to achieving, the completion date. These may include accelerative measures.

The judge decided that the obligation of due diligence imports but is not limited to an obligation to carry out and to complete the works expeditiously. In completing his assessment of what constitutes due diligence, the judge concluded that due diligence is not determined subjectively by reference to the individual contractor’s achievements (or lack of them): it is a contractual requirement with which the contractor must comply, and is to be assessed in the light of the other contractual obligations that the contractor has undertaken.

The judge had no difficulty in concluding that the evidence pointed overwhelmingly to the conclusion that SCL had failed to exercise due diligence during the warning period. He therefore held that Sabic was entitled to terminate the contract and recover its costs to complete the works from SCL, which he assessed at slightly over £39m.

Nick Henderson is a partner in Bond Dickinson. The firm acted for Sabic in this case