In brief

  • Where an agreement imposes an obligation for ‘reasonable commercial endeavours’ to be used to satisfy conditions precedent, the use of the word ‘commercial’ indicates the need for some commercial steps to be taken to enable the satisfaction of those conditions.
  • The expressions ‘best endeavours’ and ‘reasonable endeavours’ are generally similar, but the word ‘commercial’ introduces an additional consideration of commercial viability.
  • As part of a commercial contract the phrase ‘reasonable commercial endeavours’ should be given a businesslike interpretation.

Summary

In Cypjayne Pty Limited v Babcock & Brown International Pty Ltd [2011] NSWCA 173, the Full Court of Appeal of New South Wales found that where an obligation to use ‘reasonable commercial endeavours’ to satisfy conditions precedent to an agreement has been imposed, a party may withdraw from the proposed transaction because it is not in the party’s commercial interests to proceed.

The purchaser, a member of a group of companies, entered into an agreement that provided for sale and purchase of 67 low-care allocated places under the Aged Care Act 1997 (Cth). After a long negotiations process and preparation of documents, the purchaser withdrew from the proposed transaction. The evidence before the court showed various correspondence between the vendor and purchaser stating that the purchaser was unable to get internal finance approval. Further evidence showed that the purchaser genuinely endeavoured to enter into the transaction by recommending the transaction to its internal finance department. The court was satisfied that both the vendor and the purchaser were aware of the purchaser’s financial position and that the purchaser did not have the capacity (in a commercial sense) to enter into the transaction.

The court held that the purchaser was obliged to take steps reasonably available to it to put itself in a position where it could enter into the transaction. However, if such endeavours did not result in it being financially able to do so, the reasonable endeavours obligation did not require the purchaser to proceed with the transaction.

Implications

This decision provides some guidance on the implications of using the relatively new contractual term of ‘reasonable commercial endeavours’ to qualify a party’s obligations.

Previously, Australian courts have provided guidance on interpreting contractual terms such as ‘best endeavours’ and ‘reasonable endeavours’. For example, when interpreting ‘reasonable endeavours’ the courts of Australia will view the obligation by the standard of what is reasonable in the circumstances.

This decision provides guidance that the addition of the word ‘commercial’ suggests the need for some commercial steps to be taken or some commercial considerations to be met.

While this decision provides some clarity to the interpretation of ‘reasonable commercial endeavours’, it should be noted that this is a decision of the Full Court of Appeal in New South Wales. This decision is therefore binding in New South Wales and of strong persuasive value in other states and territories.