“All reasonable endeavours” considered by the High Court

United Kingdom

A property development company has been awarded damages of £13.4 million after negotiations to develop an ‘eco-town’ in Oxfordshire broke down.  In Brooke Homes (Bicester) Limited v Portfolio Property Partners Limited and Others [2021] EWHC 3015 (Ch), the High Court considered the enforceability of obligations to negotiate, and the judgment provides some much-needed guidance on the scope of “all reasonable endeavours” clauses.  Fleshing out the duty, the judge determined that a court will usually expect active endeavour where all reasonable endeavours are required, and the parties’ positions may be considered in the assessment of what is reasonable even if that results in some subordination of commercial interests.

Endeavours clauses

Endeavours clauses oblige a party to try and fulfil an outcome or achieve a result. There is a range of endeavours clauses, it being generally accepted that “reasonable endeavours” and “best endeavours” fall at either end of the spectrum. An obligation to use reasonable endeavours will generally be discharged if one reasonable path is taken.  An obligation to use “best endeavours”, however, is normally interpreted as requiring all reasonable actions to be exhausted, whilst considering the other party’s position (which might require, depending on the context, a sacrifice of the party’s own commercial interests). An obligation to use “all reasonable endeavours” falls somewhere in between. Despite endeavours clauses being widely used in commercial contracts and settlement agreements, there remains uncertainty around what the different types of clauses entail in practice, particularly those falling in the grey area between reasonable and best endeavours.

Background

The claim arises out of the proposed development of land to the North-West of Bicester, in Oxfordshire, designated for the building of a zero-carbon “eco-town”.  Between 2009 and 2014, the first and second defendant firms (the P3 Group) built up a portfolio of land for development and, on 31 December 2014, the P3 Group submitted its application for outline planning permission.  Having started the planning process, the P3 Group set about finding a developer for the project.  The claimant (Brooke) was identified as a suitable option due to its experience in modular housing which was compatible with the eco-town concept.  The parties broadly agreed that, subject to the grant of planning permission and certain other conditions, Brooke would purchase land from the P3 Group portfolio for the development of private residential homes. In April 2015 the parties formalised this intention by entering into Heads of Agreement and two associated contracts (the Agreements). Under the Agreements, the parties agreed to use all reasonable endeavours to enter into a conditional sale agreement (CSA), to act in good faith and to observe certain exclusivity provisions.  Crucially, it was also agreed that the contemplated sale was to be structured in a manner which would most effectively achieve the desired commercial and financial outcome for both parties.  

Despite the grant of outline planning permission for the wider scheme in March 2017, the parties had failed to conclude the CSA and relationships had become strained. Brooke issued proceedings against the P3 Group in December 2018 complaining that it was in breach of contract for the sale of land to Brooke.  By 2020, the claim had been amended to include the addition of further parties who Brooke alleged had also been involved in improper collusive conduct, inciting the breach of contract by the P3 Group.

The court held that the P3 Group was in breach of its positive obligations under the Agreements to use all reasonable endeavours and to negotiate in good faith to translate the intended transaction into a CSA, depriving Brooke of the chance to secure a CSA on beneficial terms. The loss of chance was valued at £13.4 million, and damages were awarded in the same amount.

“All reasonable endeavours”

Determining whether the P3 Group was in breach involved a consideration of the law on endeavours clauses, in particular what an “all reasonable endeavours” clause requires in practice. 

The judge set out that “active endeavour is required…where all reasonable endeavours are required: passivity or inactivity is likely to be construed as a breach”. One of the key factors in finding that the P3 Group had breached its obligations was the lack of a plan from the P3 Group of the land which might be sold to Brooke. The judge was unpersuaded that a plan could not be produced (and, thus the CSA could not be concluded) because, until planning consent was granted, the P3 Group did not know exactly what land within the wider scheme was going to be permitted for private residential development.  This was not an insurmountable problem, in the judge’s view, as the introduction of a clause which contemplated provisional demarcation of the land to be transferred was a reasonable alternative solution which the P3 Group failed to take forward.

In supporting the findings of breach in relation to the plans issue, the judge considered the positions of the respective parties.  On the evidence, it was clear that by the middle of 2018, the P3 Group’s preference was to move discussions forward with another party for the sale of parts of the land subject to the Agreements. The P3 group had unilaterally decided it was in its best commercial interests to negotiate the sale of its portfolio with alternative parties.  In the judge’s view this constituted a breach of the exclusivity restrictions as well as a breach of the duties to use all reasonable endeavours and act in good faith.  The mutual benefit clause clearly also had some bearing. The judge concluded that whilst mutual benefit clauses do not go so far as to require one or other party to ignore their own commercial interests, it does require that they have regard to the other party's commercial interests, to mutual benefit, and also the overall desired outcome.

Implications

The judgment reconfirms the willingness of the court to recognise an obligation to negotiate using reasonable endeavours, or in good faith.

The meaning of “all reasonable endeavours” appears to have been moved towards the more stringent requirements of a “best endeavours” clause.  The judge was willing to find the P3 Group in breach of contract even when, conceptually, this may have involved a commercial sacrifice on the P3 Group’s part. The need for active endeavour suggests all (or, at least, more than one) reasonable action(s) must be pursued for the duty to be adequately discharged.  It was also previously unclear whether the interests of the parties should be considered, but the judge’s assessment of Brooke’s weakened position, in light of the P3 Group’s negotiations with third parties, was evidently persuasive to the overall finding of breach. Whether the conclusion may have been different if the Agreements did not include certain exclusivity provisions and a mutual benefit clause is unclear.

Great care must be taken when including endeavours clauses in commercial agreements as, ultimately, the precise requirements will depend on the context in which the wording arises. Where possible, the actions the parties are expected to take to try and fulfil the desired outcome should be set out in the agreement itself. Where there is a requirement to use “all reasonable endeavours”, it would also be prudent to keep an accurate record of the steps/actions taken (and reasons for not taking a step/action) towards the object or result which the endeavour obligation is directed.   

Further reading:

Brooke Homes (Bicester) Limited v Portfolio Property Partners Limited and Others [2021] EWHC 3015 (Ch)