UpdateKnow Your Obligations: “All Reasonable Endeavours”, “Good Faith” and “Mutual Benefit” Clauses

26th April 2022
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Commercial parties want certainty in their dealings. The recent High Court case of Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd ought to make commercial parties think twice about casually inserting ill-defined endeavours or good faith clauses into their agreements, or else they might find themselves liable to pay millions of pounds in damages for breaching such obligations. The judgment provides some useful guidance on the interpretation of these clauses, although it is made clear that the scope of any such obligation depends ultimately on the precise words used and the context in which those words are used.

Factual Background:

The P3 Group acquired rights to land in Bicester, Oxfordshire which was earmarked for the development of an eco-town. In 2015, after identifying Brooke as a suitable developer, the P3 Group entered into binding Heads of Agreement with Brooke. The Agreement obliged the parties to use “all reasonable endeavours” to enter into a final agreement capturing the terms of the Heads of Agreement, including entry into a conditional sale agreement for part of the land which was to be developed for private residential use. The Agreement also required the parties to act in “good faith” towards each other and contained a “mutual benefit” clause stipulating that the contemplated transaction ought to be structured in a manner which most effectively achieved the commercial and financial outcome for both parties. The parties entered into a separate Exclusivity Agreement regarding the transaction too (together ‘the Agreements’).

The negotiations dragged on for several years and over time the parties’ relationship strained. By early 2018, no final agreement had been entered into between the parties and the P3 Group was by this time negotiating with others. At trial, the judge had to determine the scope of the parties’ obligations in the Agreements and whether the P3 Group had breached such obligations. In doing so, the judge provided a helpful insight into the interpretation of endeavours clauses and their relationship with good faith and mutual benefit clauses.

Endeavours Clauses:

Commercial parties often don’t want to run the risk of becoming contractually liable if they fail to achieve, or procure the achievement of, a particular outcome. It is therefore quite common for contracts to include endeavours clauses, obliging the parties to try or endeavour to reach a particular outcome. The jurisprudence in this area focuses on three of the most common endeavours duties: ‘best endeavours’, ‘all reasonable endeavours’ and ‘reasonable endeavours’. The Brooke judgment reiterates the traditional position that reasonable endeavours clauses tend to sit at the bottom of this hierarchy of three, imposing the least onerous obligation on the parties. An obligation to use reasonable endeavours might mean that if one reasonable course is taken, the duty is discharged. This relatively less onerous duty sharply juxtaposes with the obligation to use best endeavours, which has traditionally been regarded as the most onerous of endeavours obligations. It is commonly interpreted as requiring all reasonable paths to be taken and, depending on context, can entail the surrender by a party of some of its commercial interests.

This leaves all reasonable endeavours clauses, the clause in issue in the Brooke case. Whilst it has traditionally been thought that all reasonable endeavours clauses sit somewhere in the middle – between best endeavours and reasonable endeavours clauses – the Brooke judgment confirms a recent thread in the jurisprudence which is that there may be “little difference” between best endeavours and all reasonable endeavours clauses. Both those clauses normally require all reasonable courses to be taken. Although subordination of a party’s commercial interests might traditionally have been associated with best endeavours clauses, what any endeavours clause requires is ultimately a matter of interpretation of the precise words in their context. Thus, all reasonable endeavours clauses might also entail the surrendering of a party’s commercial interests.

The Brooke judgment offers further guidance on all reasonable endeavours duties. Such duties require an active effort; passivity may be construed as a breach. Defendants can also be required to explain why they did not follow a reasonable course of action identified by the claimant. An endeavour is treated by the court as reasonable if it has a significant or substantial chance/real prospect of achieving the desired outcome.

Good Faith and Mutual Benefit:

What is interesting about the Brooke case is that the contractual background included a good faith and a mutual benefit clause (as outlined above). These clauses helped to flesh out the parties’ duty to use all reasonable endeavours in this context.

Like all reasonable endeavours clauses, good faith clauses also take their shape from the rest of the contractual agreement. The judge in Brooke summarised what a contractual duty of good faith may require, absent any significant indications to the contrary (there being none in this case):

  • Acting honestly, as judged by reference to reasonable and honest people;
  • Observing reasonable commercial standards of fair dealing;
  • Faithfulness to the common or contractual purpose;
  • Acting consistently with the justified expectations of the parties.

Guidance was also given on how to interpret a mutual benefit clause like the one in this case. The judge helpfully considered that such a clause:

  • Does not require a party to ignore their own commercial interests, but it does require that they have regard to the other party’s commercial interests, to mutual benefit, and also the overall desired outcome.
  • Has some significance in the context of any proposed variations to the terms agreed by the parties; if one party requests a reasonable variation which is clearly of benefit to that party and to achieving an overall desired outcome for both parties, and which is of no substantial detriment to the other party, that other party might be required to agree to it.
  • Informs the assessment of whether any all reasonable endeavours or good faith duties have been discharged.
  • Informs the question of whether a party is to be viewed as having withdrawn from the contemplated transaction, or if it had come to an end.

The Outcome:

The judge found that by no later than the start of 2018, the P3 Group were not using all reasonable endeavours or acting in good faith and were in breach of their Agreements. A number of reasons were given for this, including:

  • The P3 Group failed to provide a plan identifying that part of the land which was to be sold to Brooke. By the end of 2017, provision of such a plan was a path that could have reasonably been adopted and no adequate explanation was given as to why they weren’t produced. It seemed that in early 2018 the P3 Group were no longer desiring to be bound by the Agreements for commercial reasons, which was a decision they could not properly make on their own, and in that respect they were not acting with faithfulness to the common contractual purpose.
  • The P3 Group breached the Exclusivity Agreement, and their duties of good faith and all reasonable endeavours when they later negotiated with third parties.
  • The P3 Group entered into charging arrangements and disposed of parts of the land without Brooke’s consent and in breach of the Exclusivity Agreement and duties of good faith.

The upshot for the P3 Group was that they were liable to pay damages for breach of contract to the tune of £13.4 million, representing Brooke’s loss of chance to complete the conditional sale agreement.

Implications:

Given the considerable sum of damages that the P3 Group was liable to pay for having breached the Agreements, commercial parties ought to be advised to take care when drafting their obligations and to understand the scope of any such obligations. Although the Brooke judgment does provide helpful guidance on how the courts interpret endeavours and good faith clauses, their precise scope is to be determined on a case-by-case basis, looking at the contractual framework and background. To avoid any uncertainty and potentially costly disputes down the line, contracting parties would be prudent to clearly define, so far as possible, the specific courses of action that either party is expected to take, including timescales and other levels of detail. Even where drafting is more elaborate, it might be sensible for commercial parties to keep a record of their justifications for taking/not taking one or other courses of action in case the reasonableness of so doing were to be disputed later on.

Matti Brooks
W Legal Limited
matti.brooks@wlegal.co.uk

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