In brief - Inaction or delay could mean failure to meet best endeavours obligation
The recent decision of the WA Supreme Court in Rehins Pty Limited v Debin Nominees Pty Limited dealt with what needs to be done by a party in compliance with the contract provisions under a sale contract to use best endeavours to achieve a subdivision.
As this case makes clear, inaction or delay could work against a party seeking to rely upon a provision in the contract relating to termination where matters required for completion have not been achieved and where the best endeavours obligation may not have been met.
Vendor required to use best endeavours to have subdivision approved
This matter involved an industrial subdivision in Kwinana in Western Australia.
The special conditions in the contract required the vendor to use its best endeavours to have the subdivision approved and registered by given dates and required settlement to be on 15 January 2006 or within 15 days of issue of a new title for land being sold (whichever was the later) but no later than 21 February 2006.
Purchaser claims that vendor not entitled to terminate contract
The contract was not completed on 21 February 2006 and the vendor sought to terminate the contract.
The purchaser stated that the vendor did not comply with its best endeavours obligations and had not dealt with its obligations to secure settlement by no later than 21 February 2006 and therefore was not entitled to terminate the contract.
Vendor failed to act to obtain consents
The court held that the vendor had in fact been dilatory in pursuing the necessary consents and resolving issues with the relevant authorities in relation to the subdivision.
The vendor seemed to have relied significantly on one of its consultants to advance matters. Even when it became aware of the lack of progress made by that consultant on its behalf, it had not done anything to address the situation and have the matter ready to settle by the date given in the contract.
End settlement date an essential term of the contract
Whilst the court held that the condition was a contingent condition, the specification of an end settlement date was held to be an essential term of the contract. This required time and action on the part of the vendor to be able to have the subdivision registered by that date so that it could convey title to the property to the purchaser.
The dates in the contract were held to be absolute and the best endeavours provision imposed upon the vendor an obligation to liaise with development authorities promptly in respect of their conditions to have the subdivision be effected and either to perform the works, or to comply with those conditions, or appropriately bond them (where allowed).
Vendor's obligation to use best endeavours not fulfilled
The court held that an obligation to use best endeavours meant an obligation to do what was reasonable and could achieve compliance with the contract provisions. This had to be done by the vendors on an objective basis.
Whilst the vendor is not required to do more than what was reasonable (objectively determined) in the circumstances, it would not get away with doing less than that. The conduct of the vendor in this case was deemed to be significantly less than what was objectively reasonable.
Vendor argues that requirement to secure subdivision not reasonable
The vendor also tried to argue that certain works had to be done which would cost in the region of $200,000 to secure subdivision and this meant that the condition was not reasonable in the circumstances (bearing in mind that the purchase price was $2.5 million), but the court did not accept this.
Ultimately the court made a decree in the nature of specific performance requiring the vendor to comply with the conditions necessary to have the subdivision approved and registered. The court also awarded damages to the purchaser.
Be wary of ultimate dates and define what is reasonable
There are four lessons that emerge from this case:
- Ensure that the extensions of time provisions are incorporated in documents if you are accepting an obligation to do something by a given date.
- Never have an ultimate date (in this case 21 February 2006) as a settlement date where it is dependent upon other matters occurring, eg registration of the plan of subdivision.
- Be careful when stipulating that a party has a right to rescind if conditions are unreasonable. Try to set out parameters which would be deemed to be unreasonable and the parameters which are reasonable. Otherwise it is up to interpretation of the parties and ultimately the decision of the court as to what is reasonable and unreasonable in the circumstances.
- Be careful when accepting obligations to use "best endeavours" or "reasonable endeavours", which the courts have held are virtually identical obligations. Try to enumerate what specific obligations each party will have, rather than using a general expression such as "best endeavours".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.