Ahmad Masood
REUTERS | Ahmad Masood

The meaning of due diligence and reasonable endeavours

In Ampurius v Telford Homes, the High Court looked at two relatively common phrases in construction contracts, “reasonable endeavours” and a promise to carry out works “with due diligence”. It is important that parties concluding contracts and their advisers are aware of the interpretation that the High Court has placed on these phrases as, although every contract will be interpreted individually, there is a chance that these interpretations will be relied upon and followed in subsequent cases.

Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd

Telford Homes was engaged in constructing a mixed residential and commercial riverside development, Creekside Village West, which was to include four blocks.

Under the parties’ bespoke contract, Telford Homes was to construct the development and grant Ampurius a series of long leases of the ground and first floor commercial units in each of the four blocks. Two of the blocks were to be completed before the other two, with a “Target [Completion] Date” some seven months apart.

The evidence was that Ampurius wanted all four blocks completed at the same time, or as close together as possible, whereas Telford Homes had insisted on staging the construction; the period of seven months was a compromise. Under clause 2.3 of the contract, Telford Homes would “procure that the… works are carried out… (v) with due diligence”. Under clause 2.4, Telford Homes would “use its reasonable endeavours to procure completion of the… works by the Target Date or as soon as reasonably possible thereafter”. Time was not made of the essence.

Against the background of the credit-crunch and disappointing sales for the first half of the development, Telford Homes encountered difficulties obtaining its second tranche of financing for the project. On 23 March 2009 it took the decision to halt work on two of the four towers, stopping work in June 2009 and telling Ampurius shortly thereafter.

In November 2009, when further monies were demanded under the contract, Ampurius asserted that Telford Homes was in continuing repudiatory breach of clauses 2.3 and 2.4 of the contract. Telford Homes denied the allegations. An extended period of “without prejudice” negotiation ensued, until repudiation was said to have been accepted by letter on 22 October 2010 (after work had been resumed, unbeknown to Ampurius).

The parties’ arguments

Ampurius alleged misrepresentation and breach of contract:

  • The misrepresentation claim failed and was unremarkable. Roth J’s judgment provides an illustration of the ordinary analysis of such claims.
  • The breach of contract claim succeeded (see paragraphs 95 onwards) and is somewhat more remarkable for Roth J’s interpretation of clauses 2.3 and 2.4 of the parties’ contract.

In summary, Ampurius argued that Telford Homes was in breach of:

  • Clause 2.3 by putting the work on hold.
  • Clause 2.4 by leaving it on hold for such a period that the Target Date was missed.

Telford Homes’ argument seems to have been that clause 2.4 was the “time clause”, and that clause 2.3 should therefore not be read as covering the same ground. Accordingly, “due diligence” should only be read as connoting due care, rather than also importing a time obligation. The argument seems to have proceeded on the basis that this was an unusual interpretation of the term, Telford Homes having apparently conceded that in a construction contract, “… ‘due diligence’ usually connotes both due care and ‘due assiduity/expedition…”.

In relation to clause 2.4, Telford Homes contended for a wide definition of “reasonable endeavours”, which encompassed the availability of funding.

Roth J’s judgment

Telford Homes’ arguments were rejected. Roth J found:

  • That there was no reason to give “due diligence” a narrower interpretation than its “usual interpretation”. Therefore, it included both the concept of “due care” and also “due assiduity/expedition”. Halting construction, Roth J decided, was hardly consistent with the exercise of due diligence, thus interpreted, rendering Telford Homes in breach of contract. He also went further, and said that had the exercise of due diligence enabled Telford Homes to deliver all of the blocks within a shorter period than that specified in clause 2.4, then it would have obliged it to do so.
  • Obiter, that Telford Homes was also in breach of clause 2.4 in any case. Although the clause could literally encompass “endeavours to have sufficient money to perform the contract”, that was not the appropriate construction. Rather, the clause was designed to excuse Telford Homes for matters outside its control that related directly to the physical performance of the work. Roth J gave the example of inclement weather or a shortage of materials for which Telford Homes was not responsible.
  • Both clauses were innominate terms, but the breaches were held to be sufficiently serious to be repudiatory.

Surprising aspects of the judgment

There are at least three surprising aspects to this judgment:

  • Telford Homes’ concession.
  • The interpretation of clause 2.3.
  • The reasoning as to clause 2.4.

Telford Homes’ concession

The first surprising aspect is Telford Homes’ concession. Diligence, and due diligence, are familiar concepts in construction contracts, and indeed other contracts. But it is not correct to say that, without more, those words usually import a time obligation. On the contrary, where a provision requiring the exercise of diligence is intended to relate to the time or speed of completion, it often, if not usually, includes words that at least refer to the speed or process of completion. See, for example:

  • Clause 2.4 of the JCT 2011 Standard Form of Building Contract, which states that the contractor shall “regularly and diligently proceed with and complete the [works] on or before the relevant Completion Date”.
  • The term sought to be implied in Greater London Council v Cleveland Bridge and Engineering Co Ltd 34 BLR 50, namely to “accomplish manufacturing, and their other tasks, with due diligence and expedition”.
  • The term cited in Greater London Council (which was taken from Keating on Construction Contracts, Sweet & Maxwell, Fourth Edition, 1978), to “…proceed with reasonable diligence and maintain reasonable progress…”.

In favour of Telford Homes’ concession is the fact that the Concise Oxford Dictionary defines:

  • Diligence as “careful and persistent work”.
  • Diligent as “careful and steady in application to one’s work or duties”.

However, as the above examples demonstrate, at least where construction contracts are concerned, common, if not “usual”, practice is to specify that terms as to diligence include expedition – if that is the parties’ intention. It is therefore questionable whether the concession was rightly made and the basis of the decision is correct.

Interpretation of clause 2.3: separate from and potentially overriding clause 2.4?

The second surprising aspect is that, even if Telford Homes’ concession was correctly made, Roth J’s decision that clauses 2.3 and 2.4 should be read separately so that clause 2.3 was interpreted as it was, seems to have been reached over-hastily. In particular, his reliance on the “presumption against surplusage” being of little weight, so as to dismiss Telford Homes’ argument on this issue, arguably misses the point.

The question is not just whether the two clauses cover the same ground, but how they are read together in the context of the contract as a whole. As Roth J appreciated, his interpretation means that if the exercise of due diligence meant that work could be completed more quickly than the “Target Date(s)”, then it would be a breach of contract not to do so. That does not sit well with, among other matters:

  • The stipulation of completion dates in the next clause.
  • Their expression as “target” dates rather than strict dates.
  • The requirement of only “reasonable endeavours” to meet those dates, and the clear contemplation that they may be missed.

Part of clause 2.3 is omitted from the judgment. It may be that it would have been an additional aid to interpretation. However, as it is, clause 2.3 appears to have related solely to matters most properly classified as the duty of care, further militating towards Telford Homes’ interpretation.

Reasoning as to clause 2.4: you can run out of materials, but you must not run out of money…

The third surprising aspect is the interpretation of clause 2.4. It seems an inherently difficult task to argue that a party should only have to exercise reasonable endeavours to have funding in place to complete a contract by a certain time. However, having accepted that the clause could bear that meaning, it is difficult to see how Roth J arrives at the conclusion that the clause was intended to cover matters related to the “physical conduct of the work”, and how that would exclude running out of money, but include running out of materials. The distinction does not seem principled. It is, after all, possible for both to arise out of matters that are outside a party’s control (and arguably the collapse of Lehman Brothers and a world recession should qualify as such a matter), just as it is possible to have contingency plans in place for both.

Somewhat ironically, it may be that while unarticulated, the decision on clause 2.4 is consistent with the usual approach, that the period in which it is reasonable to require a party to perform their side of such a contract is not usually affected by that party’s means.

What do I take from all this?

Although clearly a case that turns on its own facts (as with all instances of contractual interpretation), Ampurius v Telford Homes relates to two relatively common phrases in construction contracts. Accordingly, it is important for parties concluding contracts and their advisers to be aware of the interpretation that the High Court has given to them. Despite the concerns outlined above and the bespoke nature of the contract, there is a chance that these interpretations will be relied upon and followed in subsequent cases.

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