On 29 June 2011, the New South Wales Court of Appeal handed down its decision in Cypjayne Pty Ltd v Babcock & Brown International Pty Ltd. In this case, the Court considered the interpretation of the phrase “reasonable commercial endeavours”. The Court decided that an obligation to use “reasonable commercial endeavours” to enter into further agreements necessary for the transaction to proceed, allowed the defendant to decide on commercial grounds not to proceed with the transaction.
The proceedings related to the proposed purchase of a retirement village business and the land upon which the business operated. The buyer had entered into an agreement with the seller for the purchase of 67 low-care Allocated Places (under the Aged Care Act, 1997 (Cth)). It was a condition precedent that the buyer also enter into agreement on mutually acceptable terms to acquire the retirement village and associated business operations. The agreement provided that the buyer and seller “must each use its reasonable commercial endeavours to ensure the Conditions are satisfied as quickly as possible including by providing all reasonable assistance to the other party”. The buyer subsequently re-assessed the transaction against its investment criteria and decided not to proceed. The seller commenced legal action seeking specific performance and damages.
The Court of Appeal considered that the critical question was whether “reasonable commercial endeavours” obliges a party to proceed with a transaction even if to do so is not in its commercial interests. The answer to this question was “no”. The obligation is to take “reasonable commercial endeavours” to enter into an agreement to effect the acquisition, however, this is not an absolute obligation.
In considering the standard imposed by the phrase “reasonable commercial endeavours”, the Court of Appeal noted that the standards of “reasonable endeavours” and “best endeavours” are similar in Australia (although by implication they are not the same), and that they require action that is measured by what is reasonable in the circumstances having regard to the nature, capacity, qualifications and responsibilities of the party in light of the contract. The key point here is that such an obligation applies according to the facts and circumstances which emerge and whether certain action is considered to fall within the standard can only be determined by a court after the event.
Interestingly, the Court of Appeal stated that the inclusion of the word “commercial” in the phrase “reasonable commercial endeavours” showed that “the parties contemplated the possibility of some commercial steps being needed to be taken … as distinct from merely making reasonable endeavours”. That is, the Court of Appeal interpreted the word “commercial” as imposing higher obligations on the parties than might necessarily be implied in the absence of that word. This observation is surprising since parties usually consider that the inclusion of the word “commercial” qualifies the extent to which conduct may be considered to be reasonable by allowing reference to commercial considerations.
Given the uncertainty present in interpreting “endeavours” clauses, there are a few strategies that a party can employ to reduce associated risks. These risks may differ according to whether the obligation is in connection with a condition precedent or is an ongoing obligation under a continuing contract. Prior to finalising contract negotiations, a party can undertake some due diligence to determine, in advance, what it is prepared to do to bring about the desired outcome. If a party is only prepared to do certain things, then it may be best to avoid a general clause and instead adopt a more specific clause that lists the actions that party is required to undertake. Alternatively, parties may want to set out express limitations on the scope of the “endeavours” clause to ensure that it does not impose open-ended obligations to take further steps and incur additional costs beyond those specifically contemplated by the contract. An acknowledgement that the “endeavours” clause does not require a party to act against its own interests can also be used to qualify the obligation.
Regardless of whether a general or specific endeavours clause is chosen, a party should develop and implement procedures or processes to demonstrate that adequate actions have been taken to satisfy their obligations under the “endeavours” clause. Although the aim of “endeavours” clauses is not to guarantee an outcome, if that outcome is not achieved, a party can better protect itself against an allegation of breach by being able to demonstrate that it took adequate steps to comply with its obligations. In the case at hand, the Court of Appeal was satisfied that the buyer had investigated potential tax and structuring options and had otherwise given proper consideration to the commercial viability of the transaction before deciding not to proceed.
The nature of the condition precedent is also critical to the outcome in each case. A distinction can be drawn between a condition precedent which requires a party to enter into a separate agreement, and those which require third party consent or approval to be obtained. In the case at hand, if the condition precedent had instead provided for, for example, the buyer to procure the approval of the Commonwealth to transfer the Allocated Places, the clause would have raised questions as to the extent to which the buyer must take certain steps, accept potentially onerous conditions and/or incur a cost burden in order to abide by the obligation to use “reasonable commercial endeavours”. For conditions precedent requiring third party approval or consent to be obtained, it is important that the condition clearly stipulates that the party who is to be bound by that consent or approval is only bound if it is given on terms or conditions acceptable to the party.