Presentation Outline de vaz_due diligence.pdf · Examples of such clauses from standard form contract Joint Contracts Tribunal (JCT) Standard Building Contract with Quantities (2011)

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© WongPartnership LLP 2014This presentation is for general information only and does not constitute legal advice. Please seek specific legal advice before acting on the contents set out herein.

This presentation is for general information only and does not constitute legal advice. Please seek specific legal advice before acting on the contents set out herein.WongPartnership LLP (UEN: T08LL0003B) is a limited liability law partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

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Construction Law Update:

Due Diligence Obligations in

Construction Contracts

Ian de Vaz

Partner

Infrastructure, Construction & Engineering Practice

SOCIETY OF CONSTRUCTION LAW (SINGAPORE) SEMINAR, 24 APRIL 2014

This presentation is for general information only and does not constitute legal advice. Please seek specific legal advice before acting on the contents set out herein. 2

Presentation Outline

• What is the obligation to proceed with due diligence?

• Consequences of failing to proceed with due diligence

• Contracting out of the obligation

• Due diligence obligations when the contract is silent

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This presentation is for general information only and does not constitute legal advice. Please seek specific legal advice before acting on the contents set out herein.

The obligation to proceed with due diligence

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Due diligence obligationsIntroduction

In any construction contract, the employer would typically have 3primary considerations:

(i) the works are completed within budget;(ii) the works achieve the requisite standards on quality; and(iii) the works are completed on time.

In relation to (iii), ancillary to meeting the contractual completiondate is important, is the need for steady and regular progress ofthe works.

A clause that provides for the contractor’s obligation to proceedwith due diligence is therefore often inserted into contracts torequire the contractor to make regular and steady progress, failingwhich the contractor would have committed a breach of contract,even if the project was completed on time.

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Due diligence obligations Introduction

Why should the employer care about due diligence,especially if ultimately, the contractor manages to meet thecompletion date?

• First, a lack of due diligence (and failure to meet interimdeadlines) is usually strongly suggestive that the contractorcannot eventually complete the works on time.

• Second, in some projects where employers require theparticipation of third parties (e.g. financers), such third partiespredicate their participation or continued involvement withsatisfactory progress in the project. Failure by the contractorto proceed with due diligence may adversely affect theinvolvement of these third parties.


Due diligence obligations Introduction

For example:

• A financier may only allow a draw-down of funds when workshave achieved certain progress milestones. The contractor’sfailure to proceed with due diligence may therefore result incash flow problems.

• A finance instrument may include clauses that provide for afinancing penalty / fee as some sort of security should theprogress milestones not be met. The contractor’s failure toproceed with due diligence may therefore trigger such

penalties.

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Due diligence obligationsCommonly used phrases that prescribe the obligation toproceed with due diligence

• proceed “regularly and diligently”

• exercise “due diligence” or “reasonable diligence”

• complete the works “as soon as possible” / “as speedily aspossible”

• proceed with “due expedition”

• proceed “without delay”

• carry our works “in a workmanlike manner”

They mean the same thing – a time obligation contractuallyimposed on the contractor to make steady and regular progress.


Due diligence obligationsExamples of such clauses from standard form contract

Singapore Institute of Architects (SIA) Conditions of Contract (Lump Sum, 9th edition)

21. DUE DILIGENCE BY CONTRACTORS

Following commencement of work under Clause 10(1) of theseConditions, the Contractor shall proceed with the Works diligently and withdue expedition at all times until completion.

Real Estate Developers’ Association of Singapore (REDAS) Design andBuild Conditions of Contract (2010, 3rd edition)

14. DUE DILIGENCE AND EXPEDITION BY CONTRACTOR

Following the commencement of work under clause 9.3 the Contractor shallproceed with the design and the construction of the Works diligently and withdue expedition at all times until completion.

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Due diligence obligations Examples of such clauses from standard form contract

Public Sector Standard Conditions of Contract (2008, 6th edition)

4.1 Contractor’s General Responsibilities

The Contractor shall with due care and diligence, design (to theextent provided for by the Contract), execute and complete the Worksand remedy any defects in the Works in accordance with theprovisions of the Contract and to the satisfaction of theSuperintending Officer. The Contractor shall provide allsuperintendence, labour, Plant, Construction Equipment, materials,goods and all other things, whether of a temporary or permanentnature required in and for such design, execution, completion of theWorks and remedying of any Defect. Nothing in this Clause shallaffect the Contractor's responsibilities under common law to completethe Works.



Joint Contracts Tribunal (JCT) Standard Building Contract with Quantities (2011)

2.1 General Obligations

The Contractor shall carry out and complete the Works in aproper and workmanlike manner and in compliance with theContract Documents, the Construction Phase Plan and otherStatutory Requirements, and shall give all notices required bythe Statutory Requirements

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International Federation of Consulting Engineers (FIDIC): Red Book (with March 2006 amendments)

8.1 COMMENCEMENT OF WORKS

The Engineer shall give the Contractor not less than 7 days' notice ofthe Commencement Date. Unless otherwise stated in the ParticularConditions, the Commencement Date shall be within 42 days afterthe Contractor receives the Letter of Acceptance.

The Contractor shall commence the execution of the works as soonas is reasonably practicable after the Commencement Date, and shallthen proceed with the Works with due expedition and without delay.


Due diligence obligations What is the obligation to proceed with due diligence?

The obligation to proceed with due diligence has been judiciallyinterpreted in the English case of West Faulkner v LondonBorough of Newham [1994] 71 BLR 1. In that case, the court wastasked with determining what constitutes the obligation toproceed “regularly and diligently”:

“My approach to the proper construction and application of the clause would

be this. Although the contractor must proceed both regularly and diligently

with the works, and although each word imports into that obligation certain

discrete concepts which would not otherwise inform it, there is a measure of

overlap between them and it is thus unhelpful to seek to define two quite

separate and distinct obligations.

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What particularly is supplied by the word "regularly" is not least arequirement to attend for work on a regular daily basis with sufficient in theway of men, materials, and plant to have the physical capacity to progressthe works substantially in accordance with contractual obligations

What in particular the word "diligently" contributes to the concept is the needto apply that physical capacity industriously and efficiently towards the sameend.

Taken together the obligation upon the contractor is essentially to proceedcontinuously, industriously and efficiently with appropriate physicalresources so as to progress the works steadily towards completionsubstantially in accordance with the contractual requirement as to time,sequence and quality of work”



Practically, this meant the contractor has to:

� Expend adequate afford in planning and scheduling theoperations;

� Mobilize resources as necessary throughout the contractperiod;

� Ensure that the quality of works are as contractually stipulated;and

� Demonstrate at each stage of the works, that the targetcompletion date are reasonably capable of being achieved

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Whether the contractor had proceeded with due diligence isultimately a question of fact. C R Rajah had the following to say inthe Singapore case of Engineering Construction Pte Ltd vAttorney General & Anor (No. 3) [1997] 2 SLR(R) 392:

Whether or not a contractor is performing with reasonable diligenceis a matter which a court has to determine in accordance with thefacts and circumstances of each case. On the facts andcircumstances of this case, the target completion of the saidexcavation works set by the Government to measure whether theplaintiff were proceeding with reasonable diligence or not , is not atall unreasonable.



The facts of Engineering Construction Pte Ltd v Attorney General & Anor(No. 3):

� The plaintiff was the main contractor for the reconstruction of Jalan Ahmad IbrahimCulvert and Jurong Tidegate. The 1st defendant the Government of Singapore, wasthe employer, and the 2nd defendant, the superintending officer.

� Due to slow progress, the Director of the Environment Engineering Department of theMinistry of the Environment sent 3 notices on behalf of the employer to remind thecontractor to exercise reasonable diligence. The contractor nevertheless failed tomeet the target deadlines set and subsequently alleged that the deadlines wereunreasonable and that they had indeed proceeded with due diligence.

� The Court took into account the contractor’s petulance, non-cooperation and attitudein discharging responsibilities to hold that the contractor had indeed failed to proceedwith due diligence.

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So what is actually considered by the court when they sayeach case “has to be determined in accordance with thefacts and circumstances of each case” ?

• What is meant by diligence “must be related to the objective”(Greater London Council v Cleveland Bridge and EngineeringCo [1986] 34 BLR 72)

What is said in the notice of motion is that there should be an obligation to proceed"with due diligence and expedition", but what is due diligence and expedition depends,of course, on the object which is sought to be achieved. If one is obliged to achieve acertain object within twelve weeks, it may be necessary to exercise much more speedthan if your only obligation is to produce it in twenty-four weeks or indeed in fouryears. The same applies to diligence. You cannot have diligence in the abstract. Itmust be related to the objective.


What is the obligation to proceed with due diligence?

Practically, this means:

• The court will pay particular attention to the amount of time thecontractor has to do the works.

• If there are programmes / timelines / schedules agreed by theparties, the courts will place particular emphasis on whether thecontractor had adhered to them.

• Failure to adhere may suggest lack of due diligence, thoughthat alone is not usually held to be conclusive.

Due diligence obligations

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In the local case of Jurong Engineering Ltd v Paccan BuildingTechnology Pte Ltd [1999] 3 SLR 667, the court referred to thesubcontract programme agreed by parties to determine if thesubcontractors proceeded with due diligence –

“If the progress of the subcontract works consistently lagged behind and did

not keep pace with the subcontract programme, then the respondents were

not proceeding with reasonable diligence. This is not saying that the dates in

the subcontract programme were peremptory.”



The facts of Jurong Engineering Ltd v Paccan Building Technology PteLtd:

� The appellants were main contractors for the construction of a main office, the substationand the guard house for Senoko Gasworks. The respondents were subcontractors hired bythe appellants.

� There was substantial delays from the start and the respondent continued to lag behind onthe subcontract programme. The respondent additionally refused to carry out instructionsfor variation works, and instructed their project manager to not attend consultants’meetings. In response, the appellant took over large sections of the subcontract worksand terminated the respondent’s contract. The respondent contended that the terminationamounted to a repudiation.

� Amongst other issues, the Court had to determine if the respondent had proceeded withreasonable diligence, and they took into account the pace of the progress vis-à-vis thesubcontract programme.

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Similarly in Hiap Tian Soon Construction Pte Ltd and another vHola Development Pte Ltd and another [2003] 1 SLR(R) 667, thecourt took into account the fact that the first plaintiff’s (contractor)progress of work consistently lagged behind the constructionprogramme which they furnished to the defendant and thearchitects to hold that the contractor had not proceeded with duediligence.

While the material contractual term in Jurong Engineering was “reasonablediligence”, I am of the view that the same principles should apply when one isdealing with the phrase “regularly and diligently”, as was used in the Contract.On the facts before me, I find that the first plaintiff’s progress of work consistentlylagged behind the construction programme which they had furnished to Hola andthe Architects …



… By January 2001, some six months after the date of commencement of the work,

the first plaintiff was already two months in delay when the progress of its work wasmeasured against the construction programme it had submitted. This delay was veryserious in the light of the fact that the contractual completion date was 9 October2001, a mere 10 months away. Further, it should be noted that the first plaintiffpersisted in its delay despite reminders from Hola to expedite the work.

Despite the Architects’ request (on or about 19 January 2001) that the first plaintiffexpedite the work and submit a revised master programme which incorporated effortsto make up for lost time, the latter submitted a revised construction programmepushing back the completion date to December 2001. However, the first plaintiff wassoon in delay again, even in respect of the revised programme. By April 2001, it wasmore than three months behind the revised schedule. A second revised programmesubmitted in or about May 2001, showed an expected completion date of April 2002.However, by 19 June 2001, the first plaintiff reported that they were 50 days behindschedule under the second revised programme.

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What if the programme / timelines / schedules agreed are impossible toachieve due to change in circumstances?

• The court will first examine if the programme / timelines / schedulesare “objectively incapable of achievement”. If they are not, the existingprogramme / timelines / schedules remain a good reference.

• It is for the contractor who asserts that it is impossible to comply withthe absolute contractual obligation to prove it.

• Even if the programme / timelines / schedules are found to beimpossible to achieve, the obligation to proceed with due diligenceremains – the court will however refer to the nearest possibleapproximation in determining if the contractor had proceeded with duediligence.



This was the dicta in the English case of Sabic UK PetrochemicalsLimited v Punj Lloyd Limited [2003] EWHC 2916 –

... there is nothing in the terms of the contract to suggest that the obligation to

exercise due diligence should be emptied of content in the event or to the extent that aparticular contractual obligation was or became incapable of performance. Taking thecontractual completion date as a working example, if achievement of that datebecame impossible and the Purchaser would be deprived of his plant by theContractor's breach of contract then, in the absence of special circumstances, thePurchaser is likely to want his plant as soon as possible. In those circumstances theobligation to exercise due diligence should attach to the contractual objective ofminimising the ongoing breach. In other words, if an absolute contractual requirementbecomes incapable of performance, the obligation to exercise due diligence will attachto the nearest possible approximation to proper contractual performance of theobligation...

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Recap : The starting point for the courts would be to consider theprogrammes / timelines / schedules agreed by the parties.

A failure to comply however only suggests a lack of reasonable diligence – it is not conclusive evidence of a lack of reasonable diligence.

There can be many reasons that contribute to the ultimate failure to adhere to the programmes / timelines / schedules other than the failure to proceed with due diligence. For example:

� Contractor’s default in its contractual obligations

� Employer’s default in preventing the contractor from carrying out the obligations

� Delays that warrants extension of time



In the local case of Compact Metal Industries Ltd v Enersave

Power Builders Pte Ltd and Others [2008] SGHC 201, the main

contractor, Enersave alleged that because the subcontractor,

Compact Metal, failed to comply with the latest schedule for

subcontract works, they must have failed to proceed regularly and

diligently.

Andrew Ang J disagreed with such assertion –

Similarly, failure to keep to the Latest Schedules is not conclusive of fault on

Compact’s part. As Simon Brown LJ in West Faulkner Associates v London

Borough of Newham [1994] 71 BLR 6 at 12 said, quoting a passage from a

professional journal:

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[F]ailure to comply with an agreed programme may be some, but

certainly is not conclusive, evidence of failure to proceed regularly and

diligently. Thus the failure to comply with the programme may be due to

the contractor’s default, or a cause of delay (warranting an extension),

or it may be that the contractor is proceeding at a rate and in a manner

which satisfies his obligation to proceed regularly and diligently even

though it differs from the programme.

[emphasis added]

In other words, even if Enersave could show a failure on Compact’s part to

comply with an agreed schedule or schedules, this in itself is not conclusive

evidence that Compact had failed to proceed regularly and diligently. No

evidence was adduced as to any agreed completion date for the Sub-

contract Works. The Sub-contract was silent on this. Enersave sought to

rely on the Latest Schedules to allege that Compact was in delay.


Consequences of failing to proceed with due diligence

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Due diligence obligations Consequences of failing to proceed with due diligence

Under common law, a failure to proceed with due diligencewill expose the contractor to damages.

In most construction contracts, there will be clausesproviding remedies for such breaches as well. This mayinclude the right to terminate the contract.

A question that arises is: if the contract already provides forremedies (e.g. the right to terminate the contract), can theemployer still claim for damages?



The short answer is “yes”.

• In Jurong Engineering Ltd v Paccan BuildingTechnology, having considered clause 35 of the contractwhich expressly provided for the right to terminate thecontract, the court nonetheless held that the employercan claim damages –

The appellants were therefore entitled to determine the subcontract and

employ other subcontractors to complete the outstanding subcontract

works, rectify any defective subcontract works and recover the additional

costs from the respondents. Accordingly, we allow the appeal with costs

here and below. The order of the court below is set aside…

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• Similarly, the court in Hiap Tian Soon Construction PteLtd and another v Hola Development Pte Ltd and anotherreached the same conclusion -

The first plaintiff had also argued that even on the assumption that the

progress of works was in delay, this would not by itself be a breach of

contract, as cl 25 only gave Hola a right to determine their employment.

This argument must be rejected in the light of Jurong Engineering, where

the Court of Appeal clearly envisaged that the breach of the obligation to

proceed with reasonable diligence will give rise to damages as well as to a

right to terminate the contractor’s employment. It should be noted that the

Court of Appeal quoted the following extract at [51] from Hudson’s Building

and Engineering Contracts,Vol 2 (11th Ed, 1995) at para 9-034 with

approval:


[E]ven in the absence of an express term for due diligence and of any

linked express termination clause, both such terms require to be implied

by law, in construction contracts and subcontracts generally, as a matter

of business efficacy. The primary obligation will, it is submitted, sound in

damages if within the rules of remoteness, as where the nature of the

work undertaken indicates that work by other contractors of the owner,

or in a subcontract of the main contractor, or commitments entered into

with neighbours or others, are within the contemplation of the contract

as being dependent on the maintenance of a reasonable rate of

progress. … [emphasis added]

I therefore allow Hola’s counterclaim for loss and damages for breach of the

Contract arising from the first plaintiff’s failure to proceed with reasonable

diligence.

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Contracting out of due diligence obligations


Due diligence obligations Contracting out of such provisions

As much as the employer would want such obligationsexpressly provided in the contract, the contractors to whichthese obligations are imposed on do not necessarily feelthe same way.

Parties are free to not contract such obligations, or tocontract other mechanisms to monitor the progress of thecontractors instead of a general obligation to proceed withdue diligence.

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Due diligence obligations Contracting out of such provisions

• Some examples of other mechanisms to monitor progress ofcontractors include:

� An elaborate work schedule / programme / timelines where remediesare expressly provided if the contractor defaults in meeting keyprogress dates.

� Provisions empowering the employer to give notice requiring thecontractor to speed up, failing which the employer is provided the rightto terminate the contract.

• Standard forms with such mechanisms in place of the generalobligation to proceed with due diligence include NEC3Engineering and Construction Contract (June 2005, withamendments in June 2006)


Due diligence obligations Consequences of not imposing due diligence obligations

If there are no due diligence obligations imposed (eitherbecause there were no express provision for due diligence,or that the obligation to proceed with due diligence was notimplied):

• Save for the express remedies provided in the contract, the employer willhave no other remedies available.

• Essentially, this means that the employer will not be able to claim fordamages for slow progress if, for example, the remedy contractuallyprovided for is the right to terminate the contract.

• Even if damages can be proven (and a claim for damages arises), the claimcan only arise after the distant completion date when damages areascertainable. This might put the employer in the risk of having to deal witha contractor that may have gone bust and is in liquidation.

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Due diligence obligations when the contract is silent


Due diligence obligations Due diligence obligations when the contract is silent

Previously it was thought that if the contract is silent on theobligation to proceed with due diligence, the courts wouldreadily imply the provision into the contract.

The rationale for this was the significant risks the employerwould be exposed to should there be no such obligationand for general business efficacy.

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There are now indications, however, that the courts are nolonger as willing to imply due diligence obligations intocontract. The English case of Leander Construction Ltd vMulalley and Company Ltd [2011] EWHC is instructive:

Facts :� The claimant was the contractor engaged to carry out ground works,

drainage, concrete framework and associated works for theemployer, the defendant.

� The defendant alleged that the claimant had failed to carry out theworks in accordance to the programme dates / periods set out in theactivity schedule of the sub-contract documents, and alternatively,failed to proceed regularly and diligently. As a result, the defendantwithheld monies due, and the contractor sued for them.



� During the proceedings, it was then discovered that there was infact no express provision requiring the contractor to proceed withdue diligence in any of the contractual documents.

� The respondent submitted that, notwithstanding this, the court oughtto imply the obligation to proceed with due diligence into thecontract.

� The claimant argued that as the contract had already provided forwhat would happen if the claimant failed to proceed with duediligence (including the remedy of termination), the court should notimply an additional obligation to proceed with due diligence into thecontract.

� The court agreed with the claimant.

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[41] The cases set out ... above demonstrate that the courts are generally slow toimply terms into a contract, particularly where, as here, there are already detailedterms and conditions. The touchstone remains the test of necessity, as Lord Clarkeemphasised in Mediterranean Salvage and Towage: is the proposed implied termnecessary to make the contract work? Or to put the question another way: in theabsence of the implied term, does the contract fail to deliver the bargain which theparties had agreed? In my view, Mulalley have not come close to demonstrating thatthe alleged term is necessary to make the contract work. It operates perfectlysatisfactorily without the implied term, and there was really no suggestion to thecontrary.

...

[46] First, the mere fact that the failure to proceed regularly and diligently cantrigger Mulalley's entitlement, under clause 12.1, to serve a notice which, if notcomplied with, could lead to termination, does not automatically mean that there wasa separate, free-standing implied term to proceed regularly anddiligently... Accordingly, as a matter of construction of clause 12.1, it cannot be saidthat the inclusion of the failure to proceed regularly and diligently as one of thecircumstances requiring a notice automatically equates to a freestanding contractualobligation to that effect.


[47] This is not a case in which the implied term arises because the parties omitted to consider and allow for the specific default that has allegedly arisen. On the contrary, clause 12.1.3 makes plain that the parties expressly considered what might happen if, in the opinion of Mulalley, Leander were not progressing regularly and diligently with the works. The parties' agreement was not that there would be a separate, positive obligation on the part of Leander to proceed regularly and diligently with the works, giving rise to a separate entitlement on the part of Mulalley, in the event of a breach, to claim unliquidated damages. Instead, the parties considered that this was a situation best dealt with by the service of a 'hurry-up' notice of the sort that the architects failed to serve in West Faulkner. In my view, it is impossible to argue that the alleged term is necessary, in circumstances where the parties must be taken to have considered this eventuality and instead decided to deal with the potential problem in an entirely different way.

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[48] Thirdly, it is important to pay particular regard to the contractual mechanism inrelation to delay. There was one completion date. If Leander failed to meet thatcontractual completion date then, subject to the extension of time provision in clause14, they would face a set-off and cross claim as provided for by clauses 10.1 and10.2. The extension of time provisions are all in relation to the contractual completiondate; there were no other dates to which the extension of time mechanism couldrelate. Thus, the alleged implied term – bringing with it the start dates, completiondates and durations for more than a dozen individual sub-contract activities - wouldcut across the express contractual mechanism in relation to delay and extensions oftime. Clause 14 would become impossible to operate; further 'implied' terms wouldbe needed for Mulalley to say that the extension of time provision in Clause 14related, not to the subcontract works, but to each 'phase' or even to each sub-contract activity. The nature of Leander's rights and duties would change completely.

[49] Finally, it seems to me that there were already a number of express and impliedterms of the sub-contract pursuant to which Mulalley could exercise considerablecontrol over Leander's performance of the sub-contract works...



Essentially, if a contract is silent on the obligation to proceedwith due diligence, whether this term will be implied dependson:

� Whether the contract provide comprehensive details on what might

happen if the contractor fails to proceed with due diligence;

� Whether the contract evinces that parties had considered what might

happen if the contractor fails to proceed with due diligence; and/or

� Whether the contract already provides for considerable control /

remedy to the employer if the contractor fails to proceed with due

diligence

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There are also indications that the type of the constructioncontract is relevant in determining if a term to proceed withdue diligence will be implied.

In Greater London Council v Cleveland Bridge and Engineering

[1986] 34 BLR 72, the court was tasked to determine if there was

implication of an obligation to proceed with due diligence in a

“supply and install” contract.

� The contract concerned the manufacturing, delivering and

installation of gates and gate arms for Thames Barrier. The

respondent contractor in the case completed the contract, but during

the course of the performance, there was a shift in the market

prices, resulting in a higher cost than initially contractually agreed.



� The claimant contended that the respondent ought to have proceeded

with due diligence, and manufactured, delivered and installed the gates

and gate arms earlier.

� As the contract in question did not have an express clause providing for

an obligation to proceed with due diligence, the claimant argued, inter

alia, that there should be an implied obligation to proceed with due

diligence.

� In declining to imply such an obligation, the English Court of Appeal

took into account that the nature of the contract was such that there are

no milestones / interim target or goals for the contractor to meet – the

only deadline the contractor had to meet was the handover of installed

gates with gate arms.

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This case therefore suggests that if the contract is one without

interim deadlines – such as a supply and install contract, the court

will be less likely to imply the obligation to proceed with due

diligence as well.

If, on the other hand, the contract is one which involves

continuous possession and overall control of the site, with

multiple interim deadlines or a project schedule / programme to

meet, the court would be more inclined to imply an obligation for

due diligence.



So if the contractor wishes to avoid the implication of theobligation to proceed with due diligence –

• The contractor should insist on contractual provisions to regulate theparties’ relationship in the event that the contractor failed to proceed withdue diligence.

• The more detailed the provisions, the more the parties considered variousscenarios, the less likely the court would imply the obligation.

• The contract should also specify as few interim deadlines as possible, or

have a project schedule / timeline that is sparse in details. This would bereflective of parties’ intention to afford as much leeway as possible on timeissues to the contractor.

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Q&A

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Thank You

Ian de Vaz, PartnerInfrastructure, Construction & EngineeringEmail: [email protected]: +65 6416 8128