Scope of endeavours and good faith obligations
In the recent case of Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd the High Court has commented on what is meant by ‘all reasonable endeavours’, ‘good faith’ and ‘mutual benefit’, but do the comments really help?
Agreements often include ‘endeavours’ clauses in an attempt to define the scope of a party’s obligations. For example, a party may be required to use ‘all reasonable endeavours’ to carry out works by a certain date. There are three types of endeavours clause that are commonly used, each one indicating a different level of obligation. The three types are ‘best’, ‘all reasonable’ and ‘reasonable’. The type of clause used is subject to negotiation between the parties. But what do the different types of clause really mean in practice? And is there really any difference between using ‘best’ or ‘all reasonable’ endeavours?
The P3 Group secured rights to acquire land for development. The claimant (BHB) was chosen as the developer. In 2015, the parties entered into binding heads of agreement (the Agreement). The Agreement required the parties to use ‘all reasonable endeavours’ to enter into a final binding agreement which captured the terms of the Agreement acting in good faith towards each other. The Agreement also included a mutual benefits clause which required the transaction to be structured in a manner, which would most effectively achieve the desired commercial and financial outcome for the parties. The Agreement anticipated the parties would enter into a conditional contract (the CSA) for the sale and development of part of the land. Alongside the Agreement, the parties entered into an exclusivity agreement.
Negotiations took longer than expected and by the end of 2017, the parties had not concluded the CSA. BHB brought proceedings against the P3 Group for breach of the Agreement.
The judge considered the meaning of ‘all reasonable endeavours’, ‘good faith’ and ‘mutual benefit’ and found that the P3 Group were in breach of contract. BHB was awarded £13.4 million in damages.
‘All reasonable endeavours’
The judge explained ‘all reasonable endeavours’ is normally interpreted as requiring all reasonable paths or actions to be exhausted. There may be little difference between an ‘all reasonable endeavours’ obligation and a ‘best endeavours’ obligation. Arguably, the slight distinction is that ‘best endeavours’ may require a party to sacrifice some commercial interests. This sacrifice may be less likely (but could still be required) under a duty to use ‘all reasonable endeavours’. In contrast, the judge suggested that ‘reasonable endeavours’ might mean if one reasonable path is taken then the obligation is discharged.
The judge identified that active endeavour is required where a party is under an obligation to use ‘all reasonable endeavours’ – passivity or inactivity is likely to be construed as a potential breach. If a reasonable course is identified by the claimant then the defendant can be required to explain why it was not required to take that course of action.
Whether a course of action is a reasonable endeavour is also subject to assessment of whether it would have had a significant or substantial chance of achieving the desired result.
What ‘good faith’ requires also depends on the wording of the agreement and the context. The judge summarised, that subject to anything contradictory in the contract, a duty of good faith may require four things, namely:
The judge considered that a mutual benefit clause:
The judge found that the P3 Group were not using all reasonable endeavours or acting in good faith. Several reasons were given for this, including:
The judge’s comments are perhaps helpful, but the fact remains that what a party must do to comply with an ‘endeavours’ or ‘good faith’ obligation must be assessed on a case-by-case basis. To overcome this uncertainty, parties should consider agreeing what specific actions they are each prepared to take and indeed what actions they are not prepared to take and set those out clearly in the documentation. It may be difficult to consider this upfront and involve difficult drafting, but the alternative of merely relying on an ‘endeavours’ clause may bring uncertainty and potentially adverse and unexpected consequences for one party as the P3 Group found to its detriment.
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