Law of Contract. Concept of Due Diligence Last updated 18-Jan-2015

Due diligence, in law, means doing everything reasonable, not everything possible.
State v Scott, 34 So. 479, 481, 110, La. 369

Origins of concept.

The precise origins of due diligence are unclear. The concept of diligence goes back to the Roman law concept of diligentia, distinguishing two main types of diligence: diligentia quam suis rebus, or the care that an ordinary person exercises in managing his or her own affairs, and diligentia exactissima or diligentia boni patrisfamilia, a more exacting type of care exercised by the head of a family. As far back as in the seventeenth century diligence was mentioned in work of Gerard de Malynes "The Maintenance of Free Trade", published in 1622, in part where the learned merchant described as diligent efforts of the crew to fight playing whales with empty barrels and "many good wares and rich commodities, wherewith one of the whales was playing." As story goes "the whales not pleased therewith" and caused significant damage to the ship’s rudder, being the reason that "they were much hindered in their Sailing."

Thomas Mun in "England’s Treasure by Foreign Trade", published in 1664 used the word diligence to enumerate necessary abilities of the merchant which require him to observe "of the rates of Exchanges by Bills … and … of the ordinary Revenues and expenses of foreign Princes."

Diligence as manifestation of certain traits of human nature possesses a score of infinite shades "from the lightest momentary thought, or transient glance of attention, to the most vigilant anxiety and solicitude". Historically English law recognises three general degrees of diligence: high, ordinary and slight. Where ordinary diligence was deemed "to be the common prudence which men of business and heads of families usually exhibit in affairs which are interesting to them".

In the modern English law concept of ‘due diligence’ is well settled. In shipping and maritime law it was introduced largely to qualify warranty of seaworthiness and provide a lower measure of obligation as compared with absolute duties under the common law. By analogy with ‘as near thereto as she may safely get’ clause, requirement to exercise ‘due diligence’ gives to both, the merchant and the carrier, more flexibility in their contractual relationships. Included in the text of the Hague Rules (Art III, 1; Art IV, 1 and 2(p)) and the Hague-Visby Rules (Art III, 1; Art IV, 1 and 2(p)) it affords considerable relief to shipowners, as well as some protection to shippers.

The carrier … will be protected against latent defects, in the strict sense, in work done on his ship, that is to say, defects not due to any negligent workmanship of repairers or others employed by the repairers and, as I see it, against defects making for unseaworthiness in the ship, however caused before it became his ship, if these could not be discovered by him, or competent experts employed by him, by the exercise of due diligence
In The Muncaster Castle [1961] 1 Lloyd’s Rep.57 per Lord Keith of Avonholm at p.87.

Usual standard of due diligence is an exercise of reasonable care and skill. In other words a task or duty should be performed so as to exclude any element of negligence. The question whether it is enough to do one’s work not negligently and not unskilfully to discharge the duty of ‘due diligence’ or there is some further margin for additional steps which one ought to have taken so that negative results might have been avoided, was considered by the House of Lords in Union of India v N.V. Reederij Amsterdam (The Amstelslot) [1963] 2 Lloyd’s Rep. 223.

The vessel suffered breakdown in reduction gear and the charterers alleged breach of contract by defendants in failing to exercise due diligence to make the ship seaworthy in that breakdown was due to improper fixing of helix tyre on drum or undiscovered fatigue crack in tyre. The owners to escape from liability under U.S. Carriage of Goods by Sea Act, 1936, Sect. 4 (1) were to prove that due diligence had been exercised by themselves and their servants and, mainly, by the Lloyd’s Register of Shipping surveyor who surveyed this tyre, but failed to discover the crack. The charterers contended that surveyor ought to have taken certain steps which he did not take and that if he had done so he might have discovered the crack. If it was a duty of surveyor to take those steps, then the shipowners could only succeed if they could prove that the crack still would not have been discovered if he had done so. But they were not able to prove that. The question therefore was formulated by the House of Lords whether a reasonable surveyor, exercising proper care and skill, would have taken those additional steps. In simple words, the charterers insisted that if by taking some additional, albeit not usually required, tests the crack in question might have been discovered then such tests fall within actions necessarily to be performed to discharge duty of due diligence.

Notably, that the charterers consented thtat there was neither lack of care nor lack of skilled knowledge and one may reasonably assume that it should have been a sufficient answer to the Charterers’ argument. The charterers, however, went further alleging that when deciding what method or methods are appropriate to the sort of examination surveyors were conducting, they made an error of judgment which a competent surveyor ought not to have made. And that misjudgment constituted negligence.

Lord Reid approached the Charterers’ arguments in the following words:

It is not enough to say that if those steps had been taken there would have been a better chance of discovering the crack. In a great many accidents it is clear after the event that if the defendant had taken certain extra precautions the accident would or might have been avoided. The question always is whether a reasonable man in the shoes of the defendant, with the skill and knowledge which the defendant had or ought to have had, would have taken those extra precautions.

His Lordship went further and laid a test of due diligence as between the gravity of consequences which may flow from failure to detect a defect and the remoteness of the chance that such a defect may exist:

The [charterers] rely on admissions by the [shipowners’] witnesses that in making an inspection they ought to look for cracks, and they argue that that must imply that they ought to take every step which would improve their chance of finding a crack. But they do not carry that argument to its logical conclusion. The best chance of finding a crack of this kind is to apply the magnaflux test, but they have been forced to admit that that would not have been a reasonable step to take in this case. So the steps which they say should have been taken would only have been a second best. There must be some compromise or balance in deciding what steps to take in any particular case, keeping in mind both the serious consequences which may flow from failure to detect a defect and the remoteness of the chance that such a defect may exist; for it would plainly be impracticable to make elaborate scientific tests for every defect which could possibly be present in any part of the machinery surveyed.

Lord Devlin criticised ‘a better chance’ approach by which the charterers thought to justify their contentions. Naturally, so far as an ideal is an unattainable standard of perfection there is almost always an opportunity to do something better than it was done before:

After all, there would be a better chance of avoiding road accidents if everyone drove at five miles an hour. This line of questioning is quite legitimate for the purpose of laying a foundation, but it does no more than that. The ultimate question is not whether there was a better chance of discovering the crack, but whether, on balance, one or more of the precautions ought to have been taken. What has to be balanced is in the one scale the extreme unlikelihood of there being any crack to be found and in the other scale the serious damage and loss that could occur if there were a crack. The balance that is so struck will determine whether or not a prudent surveyor should have felt it necessary to do more than these surveyors did.

In light of this decision obiter of Parker LJ in K/S Penta Shipping A/S v Ethiopean Shipping Lines Corp (The Saga Cob) [1992] 2 Lloyd’s Rep 545 is at least questionable.

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Readers’ comments:

Posted by: Darlingtons, 14 June 2012

Interesting that due diligence has maritime links and has always been associated with warranties, which usually bridge the gap between what is ascertainable from enquires and paperwork with what is not and forward looking possible problems.
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