These obligations are often used together (and commonly in long term development agreements) but what do they entail and what are the potential traps?
An endeavour obligation is a requirement to try to achieve a result; for example, to seek to obtain planning permission. Case law indicates a sliding scale of endeavour obligations and care is needed as their satisfaction is assessed by reference to circumstances at the time of performance which may be more onerous than when the contract was entered into.
On the scale of endeavour obligations, the least stringent is "reasonable endeavours" where there may be several ways of achieving an objective. Whilst it is important to consider the likelihood of achieving that objective, there is only a requirement to take one reasonable course of action towards it rather than exhausting all options. Whilst it may involve reasonable expenditure, there is no obligation for a party to act against its commercial interests.
The next is "all reasonable endeavours" which was often considered to sit between 'best' and 'reasonable' endeavours, but more recent case law indicates it may be closer to 'best'. It potentially involves some sacrifice of commercial interest and a higher level of expenditure and is likely to include a duty to report on progress with compliance. It requires the taking of all reasonable courses of action until no more are available, but there is a margin of discretion as to discharging the obligation acknowledging that some actions may be outside of a party's control. In the Yewbelle case, the court held that an "all reasonable endeavours" obligation did not extend to having to buy additional land in order to provide a library to conclude a section 106 agreement.
"All reasonable but commercially prudent endeavours" came to prominence in the CPC Group case where the court held that (in the context of obtaining planning permission for a contentious development) the parties were not expected to act against their respective commercial interests, but rather could follow another course of action if advised it had a greater chance of success.
"Best endeavours" is the most onerous with the requirement to take all reasonable courses of action available. Once those options are exhausted, it would be unwise to "down tools" without reference to all parties. It is likely to involve significant expenditure (but not so that a party incurs financial ruin and directors also need to consider their duties) and an obligation to litigate or lodge, for example, a planning appeal.
What are the possible ways to mitigate your exposure under an 'endeavours' obligation at drafting stage?
- Avoid agreeing to use uncertain and untested obligations such as "utmost endeavours".
- Expressly set out both those actions that are required and those that are not required to ensure compliance, for example to submit a planning application but no requirement to lodge a planning appeal.
- Allow sufficient time under the contract to comply with your obligations, particularly where third-party approval or assistance is required.
- Consider whether the agreement can be terminated if the obligations cannot be satisfied by specified dates.
The starting point is that English and Welsh contract law has no general doctrine of "good faith", but the courts will uphold express obligations to act in good faith. The obligation is wider than just behaving honestly, with a requirement for fair and honest dealings and a full disclosure of facts material to the contract's performance. This means remaining faithful to agreed common objectives and working together to resolve contractual difficulties. In the case of Berkeley Community Villages, a landowner and developer entered into a promotion agreement for potential residential development. The court held that the landowner's attempt to sell to a third party when the developer had invested considerable time and money to secure planning permission was a breach of its good faith obligation.
What are the possible ways to mitigate your exposure under a "good faith" obligation at drafting stage?
- Limit the obligation to specific obligations (e.g. to obtain planning permission) rather than the whole contract.
- Impose time limits on the duration of the obligation.
In summary, endeavour obligations define a specific goal or outcome that one party must try to achieve. A good faith obligation overlayed would dictate how that goal should be pursued. Clear contract drafting and transparent conduct are essential to minimise risk in this area.
For further information please contact Darrell Chiheb or Andrew Williams.
