'Proceed with due diligence': What does it mean in construction contracts and development agreements?

'Proceed with due diligence': What does it mean in construction contracts and development agreements?

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Author: Simon Wain

The Technology and Construction Court examined this issue in a recent case - Sabic UK Petrochemicals Limited v Punj Lloyd Limited - and found that the contractor was in breach of the obligation.

The case arose out of the construction of a petrochemicals plant in the north east of England. The parties entered into an engineering procurement construction (EPC) contract for delivery of the plant.

The purchaser, Sabic UK, considered that the contractor, Simon Carves, was not proceeding with due diligence as required by the EPC contract.

Having issued a warning notice under the contract, Sabic terminated the contractor's employment. Among other issues, the court was asked to examine whether the contractor was in fact in breach of contract in not proceeding with due diligence.

The contractor maintained that due diligence required a contractor to maintain an appropriate rate of progress having regard to both the requirements of the contract and the date by which completion could realistically be achieved at the time that the contractor's rate of progress was being assessed.

The contractor stated that it was not obliged to achieve the impossible and, if the works were in delay, it was not required to take accelerative measures to try to comply with the contractual completion date.

The judge disagreed with the contractor and, citing the decision in West Faulkner, put forward five propositions.

. The fact that complying with one or more of its absolute contractual obligations has become unachievable does not mean or imply that these obligations are objectively incapable of achievement. A contractor would have to prove that it is impossible to comply with the absolute contractual obligation, for instance completing by a certain date.

. The fact that the parties both contemplated that completion could not realistically be achieved before a certain date did not mean that this date was the earliest which could be achieved under any circumstances.

. There was nothing in the terms of the contract in question to suggest that the obligation to exercise due diligence should be 'emptied of content' just because the completion date was not achievable. Even if the purchaser could not have his plant by the contractual completion date he would still want it as soon as possible. The obligation to exercise due diligence should be seen in the context of the objective of minimising the breach.

. Where the contractor says that an absolute contractual obligation (to complete) is not capable of performance, the Court will want to scrutinise the reasons why that is the case.

. The obligation to exercise due diligence will be read in the context of what is required from time to time to achieve contractual objects, such as completion dates. Therefore, circumstances may arise where the exercising of due diligence may require taking measures not originally contemplated in the contract, most particularly acceleration measures, if that is what is required.

In summary, the court found that the contractor was in breach of the obligation to proceed with due diligence. Due diligence did not mean just regular progress, but should be viewed in the context of the delay which had already happened and which required the contractor to take measures to try to meet the contractual completion date.

It may not be enough for a contractor that has allowed the programme to slip then merely to regain progress that should have been made had the programme not slipped. The contractor may have to take measures to remedy the breach, including expensive accelerative measures, or risk having its employment terminated.

Contractual requirements to proceed with 'due diligence' or 'regularly and diligently' therefore impose strict obligations on contractors and developers, particularly if the timetable slips.