What constitutes “reasonable endeavours”?
The key takeaway
Positive action must be taken to fulfil a “reasonable endeavours” obligation.
Gaia Ventures Limited (Gaia) and Abbeygate Helical (Leisure Plaza) Limited (Abbeygate) entered into an agreement regarding the re-development of an ice rink and loading bay of the Leisure Plaza in Milton Keynes.
Abbeygate was obligated to make a £1.4m overage payment to Gaia, once the planning permission and other conditions had been granted, but only if this occurred by the longstop date which was 10 years away. The agreement stipulated that Abbeygate would use “reasonable endeavours” to guarantee full title to the land “as soon as reasonably practicable”. However, Abbeygate only came to an agreement on the leases four days after the longstop date, meaning that no payment was due to Gaia, which inevitably started a dispute between the two parties.
At first instance, the judge found that Abbeygate had failed to fulfil its obligation to Gaia. He stated that what was important was “whether the relevant step was feasible, and then whether in all the circumstances, it was reasonable to take it (or unreasonable not to take it), balancing the risk of adverse consequences against the obligation to perform the promise”. He found that Abbeygate had deliberately taken advantage of delays and had not taken any positive action to perform the obligation so that they would avoid paying the overage fee. Finally, citing Alghussein v Eton, he held that in this case, using reasonable endeavours excluded the developer’s capacity to delay fulfilling the conditions in order to wait for financing.
Abbeygate appealed on the basis that a reasonable endeavours clause should not prevent a business from acting on its own commercial interests. However, the Court of Appeal determined that Norris J was correct to conclude that Abbeygate had “manipulated” the conditions in order to avoid paying the overage fee.
Patten LJ looked at whether there was an objective justification for time that it took for Abbeygate to satisfy a condition. Males LJ answered the question succinctly in saying that Abbeygate “devoted its energies to ensuring that the outcome would not be achieved until after the date when it would escape liability to make the overage payment”.
Slightly differing from the judge, the Court of Appeal found that it was too far-reaching to suggest that issues of profitability should not be considered when deciding what a reasonable step to take would be.
Why is this important?
This decision shows that an obligation to use reasonable endeavours includes an obligation to act positively to perform the obligation, and parties should not purposefully act in a way to avoid the relevant outcome.
Any practical tips?
Where possible, include specific obligations to stipulate the required steps, and how and when a party should comply with their obligations. “Reasonable endeavours” obligations can then bolster those specific obligations. If you are contractually obliged to take reasonable endeavours, make sure that you pursue a positive action and are not seen to be attempting to frustrate the commercial outcome.