At the start of a business relationship, with the world full of promise, it is common to rely on another's "reasonable endeavours" to get the job done. But the inherent vagueness of the term is open to abuse, leaving the heart of your deal exposed.
Be wary of the word "commercial"
Recently, a buyer successfully defended legal proceedings after withdrawing from a $30m purchase of an aged care facility. The buyer had promised to use "reasonable commercial endeavours" to enter into separate acquisition and financing agreements.
The NSW Court of Appeal determined that the buyer could withdraw when it formed the view that it was not in its commercial interests to go ahead ( Cypjayne Pty Limited v Babcock & Brown International [2011] NSWCA 173).
The use of the word "commercial" can imply that some commercial steps need to be taken, as distinct from merely doing that which has already been agreed. This means you are more likely to be able to enforce a promise made to you if you omit the word "commercial".
Even if you do this, it is important to make it crystal clear what "reasonable endeavours" actually means.
Be specific
Be very specific in the language of the contract. Even if it is logical and obvious for particular things to happen for the deal to be done, you should still specify clearly what endeavours are required.
Make sure you also include the duty to act in good faith. This can include an obligation to act reasonably and honestly, without any other commercial motive.
Seven questions to ask yourself
These questions can help you to formulate what terms to include in your contract if you are relying on someone's "reasonable endeavours" to get the deal over the line.
- What do you specifically want or not want?
- What does the other person have to do, who is that person, how do they have to do it and by when?
- Is there an identifiable point at which you might decide the objective is not achievable?
- Are you relying on the other person's resources? If so, what are they and how will they be used?
- Are there any external influences on the other person that may prevent them meeting their obligations?
- Is there a person who can waive the need for obligations to be met? If waived, should there be other changes (eg a price reduction)?
- What should the consequences be if obligations are not met?
Example - pub sale
Let's say you're selling a pub. The sale contract will normally be conditional on government approval of the transfer of the liquor licence, requiring the buyer to use "reasonable endeavours" to obtain that approval.
But it would be remiss to leave it at that. The contract should:
- describe the objective - the sale of the pub - in some detail
- specify timing - eg date for preparation of the application, lodgement, acceptance and, if necessary, court appeals
- describe what transfer applications must be made, by whom and by when
- require the buyer to commence court proceedings to appeal any adverse decision and to spend money engaging experts to do so, unless there are no reasonable prospects of success
- allow you (as seller) to lodge a separate application and run separate proceedings with your nominated licensee if the transfer application is rejected (eg because the proposed licensee is of poor character)
- grant you a power of attorney to sign applications on behalf of the buyer
- specify that all related costs are paid by the buyer
Including these specifics makes it easier for you to enforce the contract and complete the sale.
You can apply the same process to many other business transactions, including leases, construction contracts, procurement contracts and professional service agreements.
For more information about property development, please see the website of CBP Lawyers or contact Brendan Maier at bpm@cbp.com.au
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.