When can you terminate for a failure to proceed regularly and diligently?

By Simon Tolson, Partner, Fenwick Elliott

Failure to proceed regularly and diligently/with due diligence

Countless 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 agreed 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 Newham1.)

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.

(See West Faulkner Associates v London Borough of Newham2 and SABIC UK Petrochemicals Limited v Punj Lloyd Limited)3

This particular issue was considered in the TCC cases, SABIC UK Petrochemicals Ltd v Punj Lloyd Ltd4 and Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd ibid. They establish the obligation of diligence is plainly linked to the parties’ contractual obligations in each particular case. However, SABIC and Vivergo provide some useful 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). Likewise the failure to produce a proper programme on which to plan the work or by which to monitor and manage the work is not decisive, 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).

In both cases, the contractor challenged the contractual termination and the employer resisted the challenge on the basis that the contracts had been validly terminated or, if they had not, that the failure to proceed diligently constituted a repudiatory breach of contract.

In both cases, the court considered that a repudiatory breach must:

• go to the root of the contract, and/or 
• show an intention not to perform or that the party has expressed that it is or will be unable to perform the obligations under the contract in some essential respect.

In SABIC, the employer contended that the sheer scale of the delay and the contractor's deliberate failures to mitigate delay, its conscious over-reporting of progress, and its partial demobilisation constituted a repudiatory breach of contract.

However, the court (Mr J Stuart-Smith) considered that, although there were deliberate decisions made by the contractor not to comply with some of its contractual obligations, when viewed in its context the actions did not show "an absolute refusal by [the contractor] to perform its side of the contract". It was also stated that "mere delay - even when substantial - is not necessarily to be equated with a renunciation of the defaulting party's side of the contract".

In Vivergo, the employer argued that the contractor's failure to commit adequate resource during the project and the prolonged delay that arose as consequence of the contractor's performance, constituted a repudiatory breach of contract. However, the court found that the contractor's failure to proceed diligently with the works did not satisfy the criteria for a repudiatory breach.

The court's finding in SABIC did not influence the outcome of the case as it had already found that the employer had validly terminated the contract. Whereas in Vivergo, as the court had found that the employer had not validly terminated the contract using the contractual mechanism, the court's decision failed to save the employer's purported termination of the contract and led to the employer itself being in repudiatory breach.

Both cases show that a failure to proceed diligently with works may contractually entitle the employer to terminate the contract, but it is only in more extreme circumstances where a court may find such a failure to be a repudiatory breach of contract - such as, potentially, a full unlawful demobilisation that materially affects the progress of the works.

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• 1. One of the writer’s cases.
• 2. (1993) 71 BLR 1 at p14
• 3. [2013] EWHC 2916 (TCC);
• 4. One of the writer’s cases.