No money, no excuse

Posted: 27/11/2012

The recent Ampurius case (Ampurius Nu Homes Holdings Limited v Telford Homes (Creekside) Limited (2012) EWHC1820 (Ch)) related to the development of some waterfront properties in Greenwich by Telford for Ampurius. The works proceeded until March 2009 when Telford ran into funding difficulties as predicted sales of early phases of the development failed to materialise and alternative finance could not be secured. Telford put the development on hold.

Ampurius sought to sue on the basis that Telford had committed a repudiatory breach of contract because (1) it had not progressed  the construction works with due diligence and (2) it had not used its reasonable endeavours to procure completion by the target date.

With regard to (1), the court found that there had indeed been a repudiatory breach on the basis of Telford’s failure to progress and in doing so addressed what the concept of “due diligence” actually meant. Whilst Telford sought to argue that they could discharge this obligation by carrying out the work with skill and care, the court’s view was that “due diligence” also inferred expedience. Deliberately putting the works on hold as Telford had done, regardless of the reason, could not be consistent with exercising due diligence. So if you agree to do something with “due diligence”, remember that you will be expected to do so both with care and in a timely fashion.

While on the  subject of “diligence”, it is also worth reminding ourselves of Leander Construction v Mulalley and Co Ltd [2011] EWHC 3449 (TCC). In that case, the main contractor (Mulalley) sought to argue that there was an implied term which obliged the sub-contractor (Leander) to proceed diligently with his works. Mulalley relied on the express term permitting it to validly terminate the contract for failure to proceed diligently. Leander contended that the sub-contract did not contain an express obligation to proceed diligently, and that such a term could not be implied. Coulson J in the TCC held that Mulalley had failed to show that the term needed to be implied into the contract as a matter of business efficacy, i.e. the term was not necessary. This serves as a reminder of the difficulties a party may have in persuading the court to imply a term for reason of business efficacy.

Back to Ampurius. Whilst no decision was needed as to (2), the court’s comments are of much interest. Telford relied on the wording of the development agreement which contained an obligation on Telford to “use its reasonable endeavours to procure completion of its works by the target date or as soon as possible thereafter …”.

Specifically, Telford argued that the “reasonable endeavours” clause covered financial resources and that it had done all it needed to do in terms of finding the finance for the development. Whilst the courts acknowledged that the lack of funding was a reason for Telford being unable to complete the development, it did not consider it to be an excuse and firmly placed the issue of finance within Telford’s risk.

The judge commented that: "… I do not think that a  "reasonable endeavours" clause as regards the time of completion in what is, in this respect, a construction contract can extend to endeavours to have sufficient money to perform the contract. Although the language could literally bear that meaning, in my judgment, on an objective reading the qualification of "reasonable endeavours", as opposed to an absolute obligation to complete, is designed to cover matters that directly relate to the physical conduct of the works, thereby providing an excuse for delay in such circumstances as inclement weather or a shortage of materials for which the defendant was not responsible. The clause does not, in my view, extend to matters antecedent or extraneous to the carrying out of the work, such as having the financial resources to do the work at all."

Given such clauses are commonplace within both construction contracts and development agreements, this decision is bound to strike a chord with most developers, especially in this testing financial climate. The message to take from this decision is to ensure your contracts are as clear as to how your objectives are to be achieved so you don’t end up finding you have agreed to do more than you bargained for. Additionally, consider whether there are any specific commercial issues that may affect your ability to achieve such objectives and ensure these are dealt with in the contract if possible. In this case, if the clause had been more widely drafted to oblige Telford to use its reasonable endeavours to “procure” the completion of the works in both a physical and financial sense, the courts may well have viewed it in a different light.

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