A recent High Court decision has considered the meaning of “reasonable endeavours” in the context of an obligation to complete construction works. The financial impact to the developer / contractor of its obligation to complete was held by the court to be irrelevant in considering whether “reasonable endeavours” had been exercised. The contractor’s ability to fund the works was to be presumed. This ruling gives pause for thought as to the extent to which an obligation to use “reasonable endeavours”, usually considered to be the weakest of endeavours clauses, requires a party to sacrifice its own commercial interests.
The relevant facts
Telford Homes (Creekside) Ltd (“Telford”) was the developer of a mixed-used development known as “Creekside Village West” in Greenwich. Telford agreed to provide a long lease of the commercial parts of the development to Ampurius Nu Homes Holdings Ltd (“Ampurius”). Telford and Ampurius entered into an Agreement for Lease on 7 October 2008 where, in return for Ampurius’ agreement to take up the lease, Telford agreed to “use its reasonable endeavours to procure completion of the Landlord’s Works by the Target Date or as soon as reasonably possible thereafter.” (“Target Date” was defined under the agreement with reference to two dates – in July 2010 and February 2011).
Telford had already commenced work on the development at the time the Agreement for Lease was signed. Work continued until March 2009 when, with the onset of the credit-crunch, demand for residential units began to dry up and Telford was unable to meet the level of pre-sales required by its development financing. As a result, Telford was unable to access additional funds and decided to suspend part of the commercial works which Ampurius was to lease. Ampurius subsequently sought to terminate the Agreement for Lease for repudiation, and one issue between the parties was whether the “reasonable endeavours” clause justified Telford’s suspension. Telford argued that the expression “reasonable endeavours” encompassed financial resources, so that a failure to complete due to funding problems would not amount to a breach provided reasonable endeavours had been made to procure finance.
The court’s decision
The court accepted that Telford had made reasonable endeavours to procure finance, but rejected Telford’s submission that funding came within the scope of the clause. According to Mr Justice Roth, the reasonable endeavours obligation was:
“…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.”
The court appears to have reached its decision by confining the clause strictly to the construction works and thereby limiting the scope of matters to be taken into account in considering “reasonable endeavours”. As the construction works themselves had not been affected, Telford was unable to find any support for its position in the reasonable endeavours clause. The court’s ruling leaves unclear, however, how such a clause would apply in circumstances where the cost of the works had risen due to unforeseen circumstances. A lack of funding in respect of the additional costs in such circumstances may not be as easily characterised as antecedent or extraneous to the carrying out of the works.
In a construction context, the implications of the court’s finding in Ampurius may extend beyond similar wording in other development agreements or agreements for lease. Construction contracts frequently make provision for parties to make their best or reasonable endeavours to mitigate delay or to overcome obstacles to the progress of the works. The logic of the decision in Ampurius may allow parties to argue that financial constraints should not be taken into account in deciding whether best or reasonable endeavours have been exercised in such cases. What Ampurius therefore highlights is the desirability, in commercial contracts, for the contract to identify when a party will be excused from performing its obligations. Listing those circumstances in a force majeure (or similar) clause often provides a clearer way of delineating when a party is excused from performing its contractual obligations.