Reasonable Endeavours - best laid plans don't always pay off
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We are regularly asked by developer clients, to advise on disputes which have arisen as a result of an alleged failure to use reasonable endeavours to perform obligations. The property market is ever-changing and what may have been a priority or a good prospect for a developer at the time of entering into the contract, which is very often before the development has even got off the ground in terms of viability and planning, may not be when the time comes for performance. All too often the eagerness of the developer to secure the site from its competitors drives an early exchange of conditional contracts with the developer being bound by obligations that it later does not want to carry out.
It seems that the perception among some developers is that an obligation to use reasonable endeavours is so vague in its nature that it will encompass all manner of sins and excuses for non-performance. Unfortunately, the Courts do not agree and the case of Gaia Ventures Limited V Abbeygate Helical (Leisure Plaza) Limited serves as a useful reminder.
The facts and background
The facts and background of the case are complex, but, essentially, Abbeygate was liable to pay overage of £1.4m under a contract if the various conditions were satisfied prior to the long stop date. Abbeygate was to use reasonable endeavours to satisfy those conditions as soon as reasonably practicable, and it will come as no surprise that the conditions were not satisfied in time and the overage was avoided. Gaia pursued Abbeygate for breach of contract seeking payment of the overage.
Disputes concerning the exercise of reasonable endeavours, or not as the case may be, are always very fact-sensitive, but, it is fairly widely accepted that where a party is to use reasonable endeavours it is entitled to have regard to its own commercial interests. It was obviously in Abbeygate's interest to avoid the overage payment if possible and so, in seeking to avoid payment, it engineered a timetable that resulted in the conditions being satisfied after the long stop date. However, the court found against Abbeygate and held that the reasonable endeavours caveat did not extend to the timing for performance. It held that the obligations on Abbeygate were effectively two-fold; it had to use reasonable endeavours to satisfy the conditions and, distinct from that, it had to do so as soon as reasonably practicable. The result was that if it was reasonable for Abbeygate to satisfy a condition, to which commercial interests could be weighed into the mix, then Abbeygate had to take such action as soon as reasonably practicable. Abbeygate was not entitled to take into account its commercial interests in deciding when the obligation should be performed.
Worst still for Abbeygate (although it would not have changed the outcome) it was found that it had not used reasonable endeavours to satisfy the conditions. Abbeygate had been careful to create a complicated structure for the development to give the impression that the delays were necessitated by ensuring adequate funding was in place; a valid commercial concern. However, the court found that Abbeygate had in fact manipulated the timetable, not to address funding concerns, but to achieve its aim of avoiding the payment.
Abbeygate was punished for what was viewed as sharp-practice and was required to pay the overage.
What you can do
There are some clear lessons to be learned from this case not just for developers, but for any party subject to a requirement to use reasonable endeavours:-
- Make sure you understand the extent of the obligation; not just what you have to do, but when you have to do it.
- Ensure that where delay or non-performance is necessary, the reasoning is carefully documented and founded on reasons of commercial soundness. The excuse cannot be that the market has changed and it is no longer a good deal.
- If you anticipate not wanting or not being able to comply with obligations take early advice on the steps that can be taken to protect you from a breach of contract claim. The evidence the Court considers when determining whether there has been a breach is the conduct of the parties prior to the breach and so it is important to understand the options available to you when considering the extent to which contractual obligations have to be complied when the deal to which they relate is no longer commercially or financially sound.
The property litigation team at Michelmores has a wealth of experience in advising clients on the issues raised in this article; both from a tactical perspective with the aim of avoiding litigation or the threat of it, or once litigation is afoot. For more information please contact Charlotte Curtis.