You could be forgiven for thinking that if you are doing your best to keep your end of a bargain then the courts would, in turn, forgive you if things don’t quite work out as planned. However, two recent cases have illustrated that doing your best just might not be good enough.
A tricky situation …
A developer was unfortunate enough to fall victim to a not uncommon problem in current times – it ran into financial difficulties part way through a project. The developer needed to renew its banking covenants and had to reduce its debt levels to be able to do that. Works were suspended because to continue would have been, in the developer’s words, ‘commercial suicide’, as its credibility with the lender would have been destroyed and due to the highly geared nature of the business would have sent them into liquidation. The renewal was ultimately successful but it was well over a year before the project completed and a claim was brought against the developer for various losses, based around the alleged breach of two of the obligations it had agreed to under the contract:
- To carry out the works diligently; and
- To use all reasonable endeavours to ensure the works were finished as soon as reasonably practicable.
The arbitrator hearing the claim found in the claimant’s favour purely on the basis that the developer had failed to complete the works diligently. He did not reach a conclusion on the question of whether or not the developer had or had not used all reasonable endeavours. However, the developer sought leave to appeal on the basis that it had, in fact, used all reasonable endeavours, even though that had not resulted in completion of the works. How, it argued, could it have been in breach of its due diligence obligations if it had used all reasonable endeavours?
You may well agree with the developer, but the court didn’t. It said that the obligations were distinct and the arbitrator’s decision was not open to sufficient doubt to justify leave to appeal.
The decision unfortunately goes to prove not only how hard it is to appeal an arbitrator’s decision but also that doing your best is not always enough.
Whilst the developer in the first case only(!) faced a claim for loss, the developer in the second faced a much more potentially damaging scenario – a claim enabling the contracting party to end the contract altogether: Not an attractive prospect in view of the fact that half of the project had been completed with the developer set to deliver, late, but otherwise in accordance with the contract, the other half. The problem here was slightly different, as the developer ran out of money part way through the project. However, the developer reassured the contracting party, throughout the delay, that as soon as funds were available works would recommence. There was a lapse of a few months but work had restarted before the contracting party attempted to bring the contract to an end.
The developer did not dispute that it was in breach of its obligations to carry out the work with due diligence and use reasonable endeavours to make sure the project was completed on time. The big question in this case was whether or not the court would support the bigger claim that the breach was enough to enable the contracting party to end the contract. Fortunately, it didn’t. The fact that the developer continued to act in good faith, making it clear that it fully intended to fulfil its obligations and recommenced work before the claim was brought all worked in its favour. Good news for the developer in the final analysis.
A tough message
It may seem unfair to be penalised for funding difficulties which are neither anticipated nor within your control, but the message is clear: If you have agreed to use reasonable endeavours and due diligence to complete the work, you’re well and truly scuppered if you don’t deliver on time. Keep showing willing, however, and you could well limit your losses.