Contractual obligations are normally absolute and failure to fulfil an obligation will be a breach of contract. Endeavours clauses are therefore used when a party is only prepared to “try” to fulfil an obligation, rather than commit to it absolutely. The meaning of an endeavours clause is determined using the normal rules of contractual interpretation. This requires assessing the clause at the time the agreement was entered into by reference to its terms and the other provisions of the agreement and the surrounding commercial context. This creates uncertainty over the meaning of a particular endeavours clause and this article seeks to provide some clarity over its meaning.
The phrase “all reasonable endeavours” is commonly adopted as a compromise between “best endeavours” and “reasonable endeavours”, it being generally accepted that “reasonable endeavours” and “best endeavours” fall at either end of the spectrum in respect of how onerous they are (best endeavours being the most onerous of the endeavours clauses). A “reasonable endeavours” type obligation is treated by the courts as less burdensome and involves the obligor balancing “the weight of their contractual obligation” to the other party against “all relevant commercial considerations” such as the obligor’s relations with third parties, its reputation, and the cost of that course of action. Best endeavours is treated by the courts as an onerous obligation and requires the obligor to take all those steps in their power which are capable of producing the desired results (which may involve the obligor sacrificing their commercial interests.
Despite endeavours clauses being widely used in commercial contracts, there remains uncertainty around what the different types of clauses entail in practice, particularly those falling in the grey area between reasonable and best endeavours. The courts have sought to seek some clarity to this in the case of Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd & Ors.
The case
Between 2009 and 2014, the first and second defendant firms (the P3 Group) built up a portfolio of land for development and, on 31 December 2014, the P3 Group submitted its application for outline planning permission and found a developer for the project (Brooke Homes).
An agreement referred to as ‘Heads of Agreement’ was entered into in April 2015 relating to an unspecified area consisting of 100 acres of the site with intended options for up to a further 400 acres priced at £800,000 per acre. Under the heads of agreement, the parties agreed to “use all reasonable endeavours” to enter into a final binding Agreement which captures legally these Heads of Agreement acting in good faith towards each other” throughout the period of the agreement.
Despite the grant of outline planning permission for the wider scheme in March 2017, the parties had failed to conclude the final binding agreement and relationships had become strained. Brooke issued proceedings against the P3 Group in December 2018 complaining that it was in breach of contract for the sale of land to Brooke.
The court held that the P3 Group was in breach of its positive obligations under the heads of agreement to use all reasonable endeavours to enter into a formal binding agreement and to negotiate in good faith to translate the intended transaction into a formal binding agreement, depriving Brooke of the chance to secure a formal binding agreement on beneficial terms. The loss of chance was valued at £13.4 million, and damages were awarded in the same amount.
All reasonable endeavours
In determining whether the P3 Group was in breach of their “all reasonable endeavours” obligation, it was necessary for the court to consider the law on endeavours clauses, in particular what an “all reasonable endeavours” clause requires in practice.
Typically, an “all reasonable endeavours” obligation is normally interpreted as requiring that all reasonable paths or actions are exhausted. In line with other cases, the judge suggested that there is little difference between this kind of endeavour obligation and the duty to use best endeavours. The judge was willing to find the P3 Group in breach of contract even though this may have involved a commercial sacrifice on the P3 Group’s part. For example, despite that fact that P3 Group had commenced potentially more favourable commercial negotiations with other parties the court still found the P3 Group guilty of their all reasonable endeavours obligation to enter into a formal binding agreement with Brooke Homes. Therefore, the need for active endeavour suggests all (or, at least, more than one) reasonable action(s) must be pursued for the duty to be adequately discharged.
In this case, a failure by the defendant, despite requests, to provide a definitive plan or agree a mechanism for identifying precisely the land that might be sold to the claimant, thereby preventing the conclusion of a sale agreement, was a breach of the obligation to use all reasonable endeavours.
There has also been case law on the meaning of “commercially reasonable endeavours” which is a phrase often used to try to water down a reasonable endeavours obligation. For example, in the case of Barclays Bank plc v UniCredit Bank AG & anr [2014] the High Court held that acting commercially reasonably only required the party to act rationally, though in the context of a particular contractual power or discretion and allowed the party exercising the power/discretion to consider its own commercial interests to the exclusion of the other party’s. However, there is little case law which provides clarity on whether this phrase would be treated any differently to a reasonable endeavours obligation, given that a reasonable endeavours obligation already involves considering all relevant commercial factors.
Our comments
In this case, the fact that P3 Group had entered into negotiations with third parties to enter into a sale agreement for the sale of the land was certainly persuasive to the overall finding of a breach of the all reasonable endeavours obligation as it was clear that P3 Group were not using all their reasonable endeavours to enter into a formal binding agreement with Brooke Homes.
Instead of using an endeavours type obligation, parties should (where possible) clearly set out in a written agreement the obligations they expect the other party to fulfil rather than just relying on an “all reasonable endeavours” obligation. Of course, if you are the party benefitting from a reasonable endeavours type obligation, it would be fair more beneficial for you if the clause was changed to an absolute contractual obligation because if the other party fails to fulfil that obligation, it would result in a breach of contract.
However, most contracts do contain reasonable endeavours type obligations so it would be prudent of businesses to keep an accurate record of the steps/actions taken (and reasons for not taking a step/action) towards the object or result which the endeavour obligation is directed in order to be in a position to be able to provide evidence that this obligation has not been complied with should a contractual dispute arise.
How can we help?
For assistance with all aspects of your commercial contracts please contact Mark Chapman or Cesare McArdle on 01276 686222 or via email: mark.chapman@herrington-carmichael.com or Cesare.Mcardle@herrington-carmichael.com.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to your own particular matter before action is taken.
