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proceeding with due diligence

28 October 2013

In the recent case of SABIC UK Petrochemicals Ltd v Punj Lloyd Ltd, the Technology and Construction Court ordered a contractor to pay £11.8 million for the costs of completing a project after its employment was terminated. Tim Claremont, partner at Browne Jacobson LLP, highlights some important issues arising from the case.

Background

SABIC UK Petrochemicals Ltd (SABIC) engaged Simon Carves Ltd (SC) to design, procure and construct a process plant for producing plastic for a contract sum of £135m (the contract). SC procured in favour of SABIC a £13.5 million performance bond and a parent company guarantee (provided by Punj Lloyd Ltd).

The contract gave SABIC the right to terminate SCs employment if either (1) despite previous warnings in writing, SC was failing to proceed with the works with due diligence or (2) SCs financial position deteriorated to the extent that its capability to adequately fulfil its obligations was placed in jeopardy.

SABIC terminated SCs engagement exercising both rights and completed the works using SCs principal subcontractors. SABIC called the performance bond and advance payment guarantee and claimed from SC the costs of completing the project and losses from delayed production.

Proceeding with due diligence

SC argued that its obligation to complete certain works by a particular date was irrelevant because achieving it was impossible and proceeding with due diligence could not require SC to achieve the impossible.

The Court did not accept SCs arguments. Contractors and employers should bear in mind that a completion deadline is often relevant to an obligation to proceed with due diligence (which requires carrying out works "industriously, assiduously, efficiently and expeditiously") because it gives the obligation context. Whilst an obligation to exercise due diligence does not give rise to an absolute contractual duty to achieve a particular outcome, the due diligence obligation does not become less onerous just because the outcome becomes impossible.

Record costs post-completion

The case highlights the benefits of implementing a robust cost allocation system when completing works after termination. Whilst SABICs system (which was periodically independently audited) did not allow SABIC to recover all of its costs, it was undoubtedly effective and assisted SABICs recovery.

Drafting caps on liability

Perhaps surprisingly, the Court held that the broadly drafted (and relatively standard) 20 cap on SCs liability did not automatically apply to SABICs claim for recovering its costs to complete the project after it terminated SCs employment, but only to SABICs claims for breaches of contractual or tortious obligations. The Court also considered that monies paid out under the bonds would not have counted towards the 20 cap. It considered that if the cap did apply, this would unfairly penalise SABIC for having provided an advance payment.

This is another reminder of the importance of clear drafting, the particular lesson here being the need to clarify how different aspects of limitations on liability interact in the event of a claim.

Financial base date

During the project, SABIC provided SC with a cash injection. Accordingly, when assessing whether or not SCs financial position had deteriorated to the extent that its capability to adequately fulfil its obligations was placed in jeopardy, the Court had to consider if the "base date" for judging any change in SCs financial position remained the original contract date or became the date of the cash injection.

To avoid similar disputes, parties who enter into variation agreements regarding cash injections should clarify whether or not the "base date" has changed.

This article was first published in Construction News

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