The NSW Court of Appeal recently had to consider the meaning of the term 'all reasonable endeavours'. On 16 August this year, they handed down their decision in an appeal against a 2006 decision of the Supreme Court of NSW.
The respondents, the Sweeneys, owned a 200 hectare property near Campbelltown in western Sydney which they used as a horse riding range. The appellants, Waters Lane and its owner Sean Martin Howard, were developers who wanted to rezone and develop the property for residential uses, including the construction of a retirement village.
The parties entered into a Heads of Agreement on or around December 2003. The agreement included a clause which required Waters Lane to use 'all reasonable endeavours' to obtain rezoning of the property and the grant of development consent for the property (Conditions) by a Sunset Date of 9 March 2006. Waters Lane had a unilateral right to extend the Sunset Date for a further 2 years by serving notice on the Sweeneys and the definition of Sunset Date was subject to any extension claimed by Waters Lane. Waters Lane never did exercise its right to extend the Sunset Date.
Waters Lane adopted what was described as a 'softly, softly' approach in its conduct and in its dealings with Council, while trying to gauge Council's attitude and response to the proposed arrangements. They claimed this was done in order to protect their investment and to mitigate the apparent risks that the full and immediate implementation of the actions would pose to the success of the project. Waters Lane was also awaiting key environment and planning regulatory reforms that they believed would increase the chances that the development would be approved.
On 15 December 2005, the Sweeneys, believing that Waters Lane was highly unlikely to be able to meet the Conditions by the Sunset Date, threatened to terminate the agreement at any time after 20 January 2006 on the grounds of 11 related material breaches of the agreement.
The appellants brought proceedings in the Supreme Court of NSW seeking declarations that they were not in material breach of the agreement and an order to restrain the Sweeneys from terminating the agreement. The Supreme Court of NSW found in favour of the Sweeneys and held that the agreement was validly terminated on 1 May 2006.
Summary of the decision of the NSW Court of Appeal
In dismissing the appeal, Tobias J held (Giles and Santow JA, concurring) that Waters Lane's 'softly, softly' approach in attempting to fulfil the Conditions, while commercially prudent, was inconsistent with their obligation to use 'all reasonable endeavours' to satisfy the Conditions by the Sunset Date.
When considering what test should be applied to exercising 'all reasonable endeavours', his Honour saw no reason not to adopt the words of Gibbs CJ in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 in this case. In Hospital Products, Gibbs CJ held, in relation to the term 'best endeavours', that 'an obligation to use best endeavours does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object, but no more'. Tobias J found the test in Hospital Products to be directly applicable to the obligation to use 'all reasonable endeavours' and said 'if this means that there is no relevant difference between the standard constituted by the expression 'all reasonable endeavours' and that constituted by the expression 'best endeavours' then so be it'. However, it was not necessary to express any final conclusion on that possibility in the present case.
Implications of the decision
The impact of this decision is that, at least in NSW, while each case must be considered in the context of its particular facts and circumstances, there may well be little or no difference between the obligation to use 'best endeavours' and 'all reasonable endeavours'.
The judge of first instance, Reid AJ, raised a possible distinction between the two in that 'best endeavours', subject to context, required the capacity and ability of the obligor to be taken into account, while a promise to use 'all reasonable endeavours' means that a party will take all such steps as objectively required and reasonable to achieve the ends specified and that 'all reasonable endeavours' is not concerned with the personal limitations of a party. These comments are interesting as they could result in a different standard being imposed depending on the status of the obligor. For example, if you are dealing with a small company, an obligation on it to use 'all reasonable endeavours' instead of its 'best endeavours' could result in 'all reasonable endeavours' being a higher standard than 'best endeavours', whereas if you are dealing with a larger, more established company, 'best endeavours' may result in a higher standard than 'all reasonable endeavours'.
Reid AJ's comments were raised but not elaborated on in the Court of Appeal decision and it will be interesting to see if this distinction will be made in future decisions.
This case also considered other interesting issues such as termination and material breach and may be found by clicking here.
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