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The meaning of diligence – the Courts' interpretation

A review of the Courts' interpretation of the term "diligence"; its effect on the underlying duty of care in a commercial contract and the likely impact on professional indemnity cover.

Interpretation in the courts

As part of its offering to professional indemnity insurance clients, DWF contributes a review service for insured professionals seeking advice on the terms of proposed contract documentation.

One of the issues which crops up time and again is the word "diligence" and its relevance to the underlying duty to use reasonable skill and care in the carrying out of the professional consultant's duties.  Should a consultant breach its contractual duty to use reasonable skill and care, it is liable in negligence.  Does the same apply if the consultant breaches its duty to exercise diligence in carrying out its Services? Does the duty to use reasonable, skill, care and diligence affect the meaning of the duty to use reasonable skill and care?  Or are the terms separate and distinct obligations, both of which may be breached?

Case law has explored this topic and offers a little more guidance on what is to be interpreted from the obligation to use diligence in carrying out services.

Riverstone Meat Co Pty Ltd v Lancashire Shipping Co Ltd [1961] AC 807 ("Riverstone Meat")

This early case, which preceded Hedley Byrne v Heller [1964] by three years, appeared in the context of shipping and concerned Rule 1 Article III of the Hague Rules which obliged carriers to "exercise due diligence…to make the ship seaworthy"

Hodson LJ considered that the obligation to use diligence amounted to an obligation to use reasonable care.  Failure to exercise due diligence equated to negligence. It should be borne in mind that this case involved interpretation of a statute, rather than a contract term.  A failure to exercise diligence required by a contract would not necessarily be construed as part of the requirement to use reasonable skill and care.

West Faulkner Associates (a firm) v Newham London Borough Council [1994] 71 BLR 1 ("West Faulkner")

This case involved an architect (WFA) whom had been found liable in damages to Newham Council for failing to notify the contractor that it had failed to proceed regularly and diligently with the works, pursuant to clause 25(1)(b) of the JCT Standard Form of Building Contract [1963] (i.e. the requirement to proceed "regularly and diligently")  Delays and failure to progress the works had resulted in the project being nearly a year behind programme. WFA failed to give notice to the employer of the contractor's failure to proceed regularly and diligently because, in short, it considered that the contractor had failed to proceed diligently but not regularly, in that the contractor had amassed sufficient resources but was disorganised and inefficient at applying them.  In the court of first instance it was found that the architect had acted negligently in failing to notify the employer, due to its misguided interpretation of clause 25. WFA appealed on the basis that notification to the employer could not occur until the contractor had failed to act both regularly and diligently, and not if the contractor's failure was in respect of only one of those terms.  In determining whether the architect had acted negligently, Simon Brown LJJ considered the meaning of clause 25(1)(b).  He cited a comment by Keating [5th ed., 1991] that "failure to comply with programme is not of itself a breach of contract but it may be some evidence of failure to proceed regularly and diligently."

He went on to offer a useful summary of the interpretation of the clause itself, as follows: "What particularly is supplied by the word "regularly" is not least a requirement to attend for work on a regular daily basis with sufficient in the way of men, materials and plant to have the physical capacity to progress the works substantially in accordance with the contractual obligations.  What in particular the word "diligently" contributes to the concept is the need to apply that physical capacity industriously and efficiently towards that same end.  Taken together, the obligation upon the contractor is essentially to proceed continuously, industriously and efficiently with (?) appropriate physical resources so as to progress the works steadily towards completion, substantially in accordance with the contractual requirements as to time, sequence and quality of works."

Consequently, the first judge's interpretation was correct and the appeal was dismissed.

This offers some insight into the legal meaning of "regularly and diligently", which is not only a common feature of construction contracts (clause 2.4 of the JCT Standard Building Contracts and 2.3 of the Design and Build Contract, for example), but frequently appears in bespoke professional appointments relating to the carrying out of design services. Designers should take note that this particular phrase requires them to not only have resources and manpower to fulfil its obligations under the contract, but to apply them to progress the services steadily towards completion of the works.

Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2012] EWHC 1280 (Ch) ("Ampurius")

In Ampurius, a development and construction company (Telford, described as "The Landlord" in the contract) was sued by a company involved in the development of an adjoining site (Ampurius) which was to benefit from two long leases on the ground and first floor commercial units in four separate blocks.  Telford ceased work in March 2009 on two of the four blocks (A and B) due to "funding difficulties" set against the backdrop of the 2008 credit crunch. Work on blocks A and B did not resume until 2010.

The terms of the contract were as follows:

  • Clause 2.3 provided that "The Landlord (Telford) will procure that the Landlord's Works are carried out (vi) with due diligence".
  • Clause 2.4 provided that "The Landlord will use its reasonable endeavours to procure completion of the Landlord's Works by the Target Date or as soon as reasonably possible thereafter".

Ampurius alleged that Telford had committed a repudiatory breach of Clauses 2.3 and 2.4. Telford argued that clause 2.3 was to be read in context, (alongside clause 2.4) as meaning only that the work should be done carefully.

Roth J ratified the claimant's contention that "due diligence" connotes due care, and due assiduity and expedition.  He also rejected the defendant's assertion that the clauses were to be read as a whole, describing the approach as "trite". He did however support the notion that due diligence does not of itself constitute a requirement as to timing, which contrasts somewhat with his accepted interpretation of "diligence".  The timing requirement in the contract in Ampurius was actually found in clause 2.4.

Roth J found that the cessation of works, despite Telford's having been led to the decision due to an unexpected lack of funding,  could not be consonant with due diligence.  In obiter, he also held that, distinguishing Yewbelle Ltd v London Green Developments Limited [2006], the "reasonable endeavours" clause in relation to timing of completion could extend to the endeavours to have sufficient money to perform the contract, and that whilst the clause contemplated, for example, inclement weather or shortage of materials, as permissible excuses for having ceased the works  it did  not include shortage of funds.  Consequently Telford was in breach of both clauses.

In considering whether the breaches could be considered repudiatory, Roth J stated that both were innominate terms (being neither conditions nor warranties), and that the breach of the terms had been repudiatory.

From a contractor's point of view, if the requirement to use due diligence does not as a standalone provision imply a timing requirement, then despite the connotation of due assiduity/expedition within the meaning of "due diligence", bespoke draftsmen must include words which incorporate a timing requirement in building contracts.  Clause 2.4 of the JCT Standard Building Contract requires that the contractor should "regularly and diligently proceed with and complete the [works] on or before the relevant Completion Date" which provides a lucid example as to how to achieve this.

From a professional consultant's point of view, consultants supported by professional indemnity insurance should be vigilant for terms requiring due diligence but which incorporate or exist alongside timing requirements. Performance guarantees cause problems for professional indemnity insurance cover, and the requirement to use "due diligence" in an absolute timing obligation would not, according to the decision in this case, negate or qualify the performance guarantee therein.

Consultants should interpret terms such as "due diligence" and "using reasonable endeavours to complete on time" appearing in the same contract as distinct obligations which should be considered separately as to whether they are likely to offend PI.  Bear in mind that the decision has been criticised by those arguing in favour of a more blended interpretation – we will keep a look out for further developments on this.

Morris Homes (West Midlands) Ltd v Keay and another [2013] EWHC 932 (TCC) ("Morris")

In similar circumstances, Morris involved a tenant (Keay) which sued a developer (Morris) for breach of an agreement for lease after the developer ceased work (procured under trade contracts) between July 2008 to January 2010 (having recommenced once funding had been acquired from Kickstart) on the grounds that the recession had rendered the project unviable.

The terms of the agreement for lease were as follows:

  • Clause 3.1 provided that "The landlord shall as soon as reasonably practicable commence and thereafter diligently carry out the Works in accordance with planning permission and all other relevant permissions consents and the documents… in a good and workmanlike manner with good quality materials…"
  • Clause 4 provided that "The landlord shall use all reasonable endeavours to ensure that the Works are completed as soon as reasonably practicable as part of the development unless prevented or delayed by any cause or circumstance not within the reasonable control of the landlord, in which case the landlord shall be entitled to an extension of time equal to the period of such delay".

Morris' contention relied on the fact that to continue with the project at the time would be to risk commercial suicide, and that the obligation to use all reasonable endeavours in clause 4 did not include the extent of committing commercial suicide.  The requirement to use diligence in clause 3.1 was rendered otiose by the fact that clause 4 had been fulfilled. The original arbitrator found that while Morris had acted consistently with clause 4, the same could not be said for the separate obligation to use diligence in clause 3.1.  This was considered on appeal but was not considered to be of general public importance by HHJ Grant in the TCC.

HHJ Grant did consider that the arbitrator had acted in accordance with the judgment of Simon Brown LJ in West Faulkner Associates and Roth J in Ampurius, galvanising the principle that the requirement to use diligence and the requirement to use reasonable endeavours are separate and distinct obligations which are not to be read in each other's context.

Porton Capital Technology Funds and others v 3M Uk Holdings Ltd and another [2011] EWHC 2895 (Comm) ("Porton")

This more recent case concerned an abortive earn-out agreement in which a shareholder (Porton) was accused of failing to meet the contractual obligation to use "diligence" to seek regulatory approval for and to market a certain product. Hamblen J held that in the context of the claim, "diligently" meant with reasonable application, industry and perseverance, and that there was no specific requirement to use reasonable care implied by the word "diligence".  

Summary

The cases referred to in this article have collectively produced a list of judicial synonyms for the word "diligence". These are as follows:

  • Riverstone Meat – reasonable care
  • West Faulkner – applying satisfactory physical capacity industriously and efficiently to achieve an end
  • Ampurius – due care, and due assiduity and expedition
  • Morris – diligence to be construed separately from reasonable skill and care
  • Porton – with reasonable application, industry and perseverance.

Since 1961 there seems to have been an about-face on the interpretation of the term "diligence" and whether its meaning forms part of the obligation to use reasonable skill and care.

The requirement to use "reasonable skill, care and diligence" would seem, on the face of it, to be a variation on the duty to use reasonable skill and care.  According to the interpretation here, its construction would be broken down as follows; the duty to use reasonable skill and care would stand as the underlying general level of care, the breach of which would constitute negligence.  The duty to use diligence would exist in and of itself, albeit subject to reasonableness.

For professional consultants, it is always prudent to ensure that the list of absolute obligations in any contract for services are qualified by the general duty to use reasonable skill and care.  The requirement to use "diligence" should, for the time being, be interpreted as being part of the list, as opposed to an enhancement of the duty of care.  

For further information contact Caroline Watkins »

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.