Meaning of “Due Diligence” and application of implied terms

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Sabic UK Petrochemicals Limited v Punj Lloyd Limited [2014] BLR 43,TCC

Sabic appointed Simon Carves Limited to design and build a low density polyethylene plant.  Punj Lloyd was Simon Carves’ parent and had provided a parent company guarantee.  They therefore became involved as a principal defendant in the subsequent litigation when Sabic gave notice for failure to proceed with due diligence and then determined Sabic’s employment under the contract on that ground.  Sabic sued for damages.

The Punj Lloyd defence was that “due diligence” did not require it to achieve the impossible, and performance of the duty should be assessed with regard to what was actually feasible at the specific time.

Held

  1. Punj Lloyd lost this argument.  The obligation of due diligence implied (but was not limited to) an obligation to carry out and to complete the engineering works INDUSTRIOUSLY, ASSIDUOUSLY, EFFICIENTY AND EXPEDITIOUSLY.  What would satisfy that obligation would depend upon what was required under the contract to achieve the contractual objectives, such as the completion date.
  2. Acting with due diligence might necessarily include the adoption of accelerated measures if delay occurred which threatened those contractual objects.  The contractor could not just shrug and argue that he was doing his best in the particular circumstances.  The Judge specifically remarked that there was no reason to think that the obligation to due diligence would become less onerous if it was or became impossible for a particular contractual objective to be achieved.
  3. The defendants also relied in their defence upon an implied term firstly that Sabic would not hinder or disrupt the contractor from carrying out its obligations, and secondly that Sabic would therefore do all that was necessary on its part to bring about the completion of the contract.  The Judge ruled that neither of these terms needed to be implied into the contract because the express terms to the contract dealt with a duty of collaboration between the parties in considerable detail and indeed spelt out many duties which in other contracts might have been expected to be implied terms.  The implication of these duties was therefore not necessary.

Comment

 

  1. It has often been thought that due diligence is a relative concept, to be applied to the contractor’s particular situation at a particular stage of the construction process.  The Judge was not having any of this.  “The standard to be applied was not be determined by what could realistically be achieved when the particular contractor’s rate of progress was being assessed.  Due diligence was not determined subjectively by reference to the individual contractor’s achievements (or lack of them).  It was a contractual requirement with which the contractor had to comply and was to be assessed in the light of the other contractual obligations that the contractor had undertaken.  In that sense it was an objective concept, though its requirements would depend in each case upon the terms of the contract in question.”
  2. The Judge did go on to say however that if the achievement of a particular contractual date became impossible then the obligation to exercise due diligence should attach instead to the contractual objective of minimising the ongoing breach.  In other words to finish as soon as possible albeit late.  It has been argued in the courts from time to time that once the contractor misses the date, he is in effect permanently in a state of failing to the issue of due diligence.  This decision confirms that this argument is just as unsupportable as the argument for subjectivity in judging diligence.
  3. The Court’s line on implied terms was definitely a hard line, and rather old fashioned.  It is often forgotten by those forming contracts that a common law implied term will only be implied if it is necessary to make the contract work.  If the contract works without it, then no implied term.

For more information, help or advice please contact Rob Langley on 0191 211 7975.