Morris Homes (West Midlands) Ltd v Keay & Keay

[2013] EWCH 932 (TCC)

This was an application for leave to appeal against an arbitration award in relation to a dispute arising out of Morris’ decision to suspend construction work at a medical centre for about 18 months from July 2008.

On 23 July 2008, Morris wrote to the contractor instructing them to suspend work in a gradual manner which would lead to the site being mothballed. All work had stopped by the end of November 2008. It was anticipated that funding would be available by early January 2010 from the government’s Kickstart initiative. Fit-out work started in April 2011 and the centre was handed over in August 2011.

Keay claimed that Morris was in breach of the agreement for lease, in that it failed to progress satisfactorily between 2008 and 2011. As a result, completion of the medical centre and its occupation were delayed, causing losses.

The Arbitrator split Morris’ obligations into three distinct parts. First, Morris was obliged to commence the works as soon as was reasonably practicable. Second, once the works had started, Morris was obliged to carry them out diligently. Finally, Morris had to use all reasonable endeavours to ensure that the works were completed as soon as reasonably practicable unless prevented or delayed by a cause or circumstance not within its reasonable control. The Judge thought this point was key. The Arbitrator had said that none of these obligations had been expressed to be subject, or subsidiary, to any of the others, and accordingly that effect had to be given to each one of them disparately.

Morris argued that in the summer of 2008, because of the financial crisis, it was faced with risking commercial suicide if it continued with the project. An obligation to use all reasonable endeavours did not oblige it to risk “commercial suicide”. However the Arbitrator noted that there were these three separate obligations. What Morris had done was to stop carrying out any of the works for well over a year. Whilst it may be arguable that by doing so Morris was using reasonable endeavours to secure its financial future and thereby preserve the possibility of the works being completed at some date in the future, in stopping work in 2008 and not starting again until January 2010, Morris was quite clearly in breach of its obligation to carry out the works diligently once they had been started.

The Arbitrator then considered causation. A tribunal has to ask what actual losses were caused by the breach. The types of losses here were diminution in value of the lease, loss of rent, additional cost of development and payments required by the tenants. All were properly claimable.

A court will only give leave to appeal an arbitration decision under s69 of the 1996 Arbitration Act if the question is one of general public importance, the decision is at least open to serious doubt or obviously wrong and it is just and proper in all the circumstances of the court to determine the question.

Whilst it was agreed that the inclusion of both an obligation to carry on works with diligence and an obligation to use reasonable endeavours, in agreements relating to development projects, is widespread, HHJ Grant QC did not consider that this meant that the case was of itself of “general public importance”. There were many decisions of many courts, both at first instance and on appeal, on questions of general public importance.

The Judge did consider the question as to whether an obligation to carry out works “diligently” in a development or construction contract relates merely to the manner in which the works are carried out (which usually involves an inquiry in relation to such matters as materials and workmanship), or to the time and/or order within which such works are carried out (which often involves an inquiry into matters such as programming and sequence of works).

The Judge agreed with the Arbitrator that if Morrs was right then it would be able to suspend the project indefinitely by reason of its own financial problems, without being in breach of contract, and there would be nothing that the Keays could do, however long the suspension of works continued. They would remain bound to take a lease of the completed shell and core whenever it was completed, and to fit it out as a medical centre, whether or not there was by then any doctor willing and able to take an under lease of it.

Different considerations arise in connection with a “reasonable endeavours” obligation to complete works as compared with a separate obligation to carry out works with diligence. A party in Morris’ position could well comply with a reasonable endeavours obligation to complete works, for instance by taking reasonable endeavours to ensure that it has sufficient capital and other management resources available, but yet be in breach of an obligation to carry out the works diligently in the manner explained above, for instance because it failed to carry out the work by using appropriate materials and/or plant in some respect, or by failing to programme the works appropriately.