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03/08/2012 - The Dangers of Reasonableness

A recent High Court case has once again highlighted the lottery in interpretation of those dangerously innocuous words "reasonable endeavours”. In this instance the developer had agreement in principle for funding a development in autumn 2008 for a mixed use scheme subject to standard pre-let conditions for sales of the residential units, which it didn’t expect to be a problem. It entered into an agreement for lease in relation to the development of the commercial elements of the project with a target date for completion for each of the two phases which were within seven months of each other. The developer had to use reasonable endeavours to procure the completion of the development by or soon after the target dates and to carry out the development with due diligence. All terms that are perfectly standard and that the developer thought it would have no problem fulfilling. Then Lehman Brothers collapsed and the market for off-plan apartments collapsed so that it could not meet the pre-let condition in its finance facility. As a result of the resultant credit crises its bank did not want to renegotiate the development finance or waive the condition. The developer tried to seek alternative finance and eventually decided to put half of the project on hold until it had the finance to complete the job, completing phase 1. The agreement for leases allowed for staged completions and the purchaser refused to complete phase 1: the developer was in breach of its contract as it was not able to complete the rest of the development.

The Judge held due diligence did not only mean that the works should be carried out with due care and attention, but also expeditiously. He found that the works had not been carried out expeditiously as Phase 2 has been put on hold and that therefore the developer was in breach.

Although the Judge did not therefore have to rule on whether or not the developer had acted with reasonable endeavours, he did express his opinion that the reasonable endeavours clause could not mean that the developer had met its obligations if it did not have funds to carry out the works: "Although the language could literally bear that meaning, in my judgment, on an objective reading the qualification of "reasonable endeavours", as opposed to an absolute obligation to complete, is designed to cover matters that directly relate to the physical conduct of the works, thereby providing an excuse for delay in such circumstances as inclement weather or a shortage of materials for which the Defendant was not responsible. The clause does not, in my view, extend to matters antecedent or extraneous to the carrying out of the work, such as having the financial resources to do the work at all.”

Finally the Judge ruled that as the breach was significant enough to go to the heart of the contract (the purchaser had always insisted that it needed both phases to be completed within a short space of time in order to obtain maximum value from the development) the purchaser was entitled to determine the contract and require the return of its deposit.

There are many cases which deal with the distinction between reasonable endeavours and best endeavours and a good rule of thumb used to be that reasonable endeavours should be doing things to honour the obligation, so far as they were within the commercial interests of the contracting party’s obligation to carry them out, whereas best endeavours could require the contracting party to act against their own commercial interests. It now appears that reasonable endeavours obligations could be construed more harshly. Therefore if performance of your obligations is contingent on any factors (above the usual force majeure clauses) make sure you bring these to the attention of your solicitor so that they can add specific clauses into the contract to deal with these.

Authored by:

Eleanor Richardson (show profile)

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