SABIC UK Petrochemicals Ltd v Punj Lloyd Ltd [2013] EWHC 2916 (TCC)
High Court, Technology and Construction Court; Stuart-Smith J; 10 October 2013.
The court upheld SABIC’s contractual termination of a construction contract for failure to proceed with due diligence and deterioration in the contractor’s financial position. However, the contractor’s conduct did not amount to repudiatory breach. The distinction mattered: a right to terminate under an express clause did not depend on establishing a common-law right to terminate.
Facts
In 2006, SABIC engaged Simon Carves Ltd (SCL) to design and construct a low-density polyethylene plant at Wilton for £135 million. SCL was a subsidiary of Punj Lloyd Ltd, which provided a parent company guarantee in June 2008 and was the defendant to SABIC’s claim. SCL subsequently entered administration in 2011.
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After delays and disputes, the parties made a further settlement agreement in July 2008. This increased the contract price, provided for substantial advance payments and incorporated a completion plan. The critical date for introducing ethylene into the plant for commissioning was fixed at 5 December 2008.
Progress continued to fall behind. SABIC gave a written warning on 3 October 2008 and terminated on 3 November. It then arranged completion of the project, using the principal subcontractors. The litigation concerned the validity and financial consequences of that termination, including money received under a performance bond and advance payment guarantee.
The contractual obligations
SCL had to carry out and complete the works with due diligence. A separate obligation required it to achieve the agreed ethylene-in date. The contract permitted termination where, despite a written warning, SCL failed to proceed with due diligence. It also permitted termination if deterioration in SCL’s financial position jeopardised its ability adequately to perform.
SABIC argued that diligence had to be assessed against the contractual objectives. SCL and Punj Lloyd argued that the court also had to recognise what completion date was realistically achievable and that diligence did not require the impossible or necessarily require acceleration.
What due diligence required
Stuart-Smith J distinguished an obligation to achieve a result from an obligation to work diligently towards it. Missing the contractual date would breach the former, but would not necessarily establish a breach of the latter. Delay could provide evidence of deficient performance; it was not automatically conclusive.
Diligence required work to be pursued industriously, efficiently and expeditiously, judged against the contract’s objectives rather than a standard reduced to match this contractor’s difficulties. Depending on the circumstances and the contractual terms, it could require acceleration.
Nor did an apparently unattainable deadline remove the obligation. If the agreed result could no longer be achieved, diligence remained directed towards the nearest possible approximation to proper performance, including minimising continuing delay. The judge also recognised the express qualification for SABIC’s own contractual failures where those failures affected SCL’s ability to perform.
Why termination was valid
The findings went beyond the bare fact of delay. They included inadequate resources, poor planning and management, failures to procure and manage necessary subcontractor services, and an inadequate response to continuing slippage. Those failures justified the October warning and persisted during the period before termination.
The warning sufficiently identified the breach. The contractual provision did not require SABIC to prescribe a detailed remedial programme. Although the warning specified seven days, a month in fact elapsed before termination, giving SCL adequate time to demonstrate that it was addressing the problems.
The financial ground also succeeded. The question was whether deterioration created a substantial jeopardy to performance, rather than a minor or fanciful risk. Financial constraints had affected resourcing and the response to delay. Support from the parent company did not establish that SCL had the resources needed to perform this particular contract.
Nevertheless, the judge rejected repudiatory breach. SCL’s failures were serious, but it still intended to complete the works. On the facts, its conduct came close to, but did not cross, the threshold for repudiation. SABIC therefore succeeded on its express contractual termination rights.
The financial result
The court found a balance of £11,797,514 due to SABIC, with statutory interest to be considered separately. The counterclaim seeking repayment of the bond and guarantee proceeds failed. SABIC’s lost-revenue claims were excluded by the contractual provision covering loss of production or profit.
The 20% aggregate liability cap did not automatically limit the entire termination account. The judge distinguished liabilities for breaches of obligation from the contractual accounting exercise on termination. He also held, as an alternative conclusion, that if the cap applied to that account, the bond proceeds would be credited before applying it.
Significance of the decision
The case shows why progress, diligence and termination must be analysed separately. Failure to meet a deadline does not itself prove a lack of diligence, while persistent failures in resources and management can justify termination under the wording of an express clause. Equally, valid contractual termination does not necessarily establish repudiatory breach: the two questions require their own analysis.
