Practical Law

A client called me recently to discuss an issue that is probably familiar to many clients. On this particular project the pace of work is slowing, the contractor has missed a number of key programme dates and completion by the contractual date for completion is looking very unlikely. The contractor is obliged to progress the works with due diligence. Is it in breach of this obligation?

Recent court guidance

Many building contracts require the contractor to carry out and complete the works by the completion date and also to proceed with the works regularly and diligently. This is widely understood to require the contractor to proceed:

“…continuously, industriously and efficiently with appropriate physical resources so as to progress the works towards completion substantially in accordance with the contractual requirements as to time, sequence and quality of work.” (Simon Brown LJ in West Faulkner Associates v London Borough of Newham.)

However, proving a lack of “due diligence” is notoriously difficult. Unless the contract provides otherwise, a contractor is entitled to programme and plan the works as it sees fit to achieve completion by the completion date.

This particular issue was considered in two recent TCC cases, Sabic UK Petrochemicals Ltd v Punj Lloyd Ltd and Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd. The obligation of diligence is clearly linked to the parties’ contractual obligations in each particular case. However, Sabic and Vivergo provide some general guidance as to how this obligation might be construed:

• Delay does not of itself provide conclusive proof of a lack of due diligence, but it may suggest and evidence a lack of due diligence (Sabic). Similarly the failure to produce a proper programme on which to plan the work or by which to monitor and manage the work is not conclusive, but may suggest and evidence a lack of due diligence (Vivergo).
• Failing to achieve the programmed productivity because of inadequate resourcing will usually evidence a failure to proceed regularly and diligently (Vivergo).
• Where an employer is actively trying to manage and mitigate any delay caused by its contractor and requests the contractor to re-deploy resources to higher priority areas, this may jeopardise any subsequent claim that the contractor has failed adequately to resource the works. This is so even though the delay has been caused by the contractor’s general lack of productivity and failure to proceed with priority areas in the first place. (Vivergo.)
• Poor labour management and inadequate supervision does not necessarily establish (on its own) that a contractor is not proceeding regularly and diligently (Vivergo).
• The fact that a contractual obligation (that is, achieving the completion date) has become impossible does not render the separate obligation of due diligence irrelevant or less onerous. The diligence obligation survives and instead attaches to the nearest possible approximation to proper contractual performance, namely, the contractual objective of minimising the ongoing breach. (Sabic.)

Can an employer now insist that its Contractor accelerate the works when it is in delay?

While this guidance is useful, it is not new. However, in the Sabic case, the judge took things a step further. He completely rejected the contractor’s argument that the diligence obligation did not require it to achieve a completion date which was impossible to achieve but that, at any given moment, the obligation of due diligence should be assessed with regard to what was feasible at that time. He said 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 it is to be assessed in the light of the other contractual obligations that the contractor has undertaken. In that sense it is an objective concept, though its requirements will depend in each case upon the terms of the contract in question. What satisfies the obligation to act with due diligence depends on what is required in order to achieve the contractual objects (that is, completion by the specified date) and might include the adoption of accelerative measures if delay threatens those contractual objects.

In general terms, unless the contract expressly provides otherwise, there is no obligation on a contractor to accelerate the works when it is in culpable delay, although a contractor can always choose to do so in order to “avoid” the consequences of late completion.

However, employers may now seek to rely on the Sabic case as giving them the right to insist that the contractor accelerate the works, at its own cost, as part of its obligation to proceed with due diligence to achieve the specified completion date. As the judge in that case made clear, the success or otherwise of this argument will depend upon the terms of the contract in question and what is required to achieve the completion date. However it seems to me that, save in the most obvious of cases, a contractor will have a number of responses to this argument, not least that it is not responsible for all or part of the delay and is not required to accelerate the works to mitigate the effects of employer delay unless it is paid to do so. A contractor may be able to re-programme, rather than accelerate, the works to mitigate its own delay, which  it is entitled to do under most forms of construction contract. However, if a contractor fails to accelerate in these circumstances could that be further evidence of a lack of due diligence?

The employer’s quandry

There is a paradox here. Most employers want to rely on their contractor’s experience and expertise to resource, plan and programme the works and achieve completion by the specified date. A contractor must be allowed to do this as he sees fit, but this makes proving a lack of due diligence difficult. However, pinning the contractor down to rigid milestone dates with delay liquidated damages attached to them brings its own problems. Although the employer may be able to monitor progress more objectively, it is much less flexible and any changes to the milestone dates or to the contractor’s programming may well constitute a variation, with the resulting time and cost consequences for the employer.