UK: Are You Trying Hard Enough? Endeavours And Good Faith Clauses In English Law Contracts

Last Updated: 9 March 2012
Article by Jonathan Angell, Sean Geraghty and James Stonehill

Published in Dechert's Commercial Matters March 2012

Parties often qualify contractual obligations in commercial contracts by including an "endeavours" clause – for example, an obligation to use reasonable, all reasonable or best endeavours (or a variation of these). However, exactly how hard a party must try in order to satisfy any such obligation is by no means certain.

Contracts sometimes also require parties to act in "good faith" or "utmost good faith". Although a frequently used concept in other jurisdictions, the obligation this imposes on parties under English law is, again, unclear.

The "Chelsea Barracks" case explored both of these types of clauses, and, in a recent case involving an airport and a low-cost airline, the meaning of "endeavours" clauses was further considered by the court.

CPC Group Limited v Qatari Diar Real Estate Investment Company (the Chelsea Barracks Case)

CPC Group Limited (CPC) and Qatari Diar Real Estate Investment Company (QD) entered into a joint venture to redevelop the Chelsea Barracks site in London. In November 2008, CPC sold its interest in the joint venture to QD for initial consideration of £38 million and deferred consideration totalling a maximum of £81 million. Pursuant to the sale and purchase agreement:

  • CPC and QD owed each other an express duty to act in the "utmost good faith"; and
  • QD had an obligation to use "all reasonable but commercially prudent endeavours" to achieve the thresholds for the payment of deferred consideration, which in practice required obtaining planning permission.

As noted in the press, the Prince of Wales expressed his dislike of the plans to redevelop the site to his Qatari royal contacts (who passed his concerns on to QD). Boris Johnson, Mayor of London, also made clear his disapproval of the plans. The original planning application was subsequently withdrawn. Amongst other issues, the judge was asked to consider:

  • whether QD's conduct in relation to the planning application (including its dealings with the Prince of Wales, Boris Johnson and withdrawing the application) amounted to a breach of its duty to act in utmost good faith or of its obligation to use all reasonable but commercially prudent endeavours; and
  • whether CPC's conduct in trying to procure an early payment of deferred consideration under the SPA also constituted a breach of its duty to act it utmost good faith.

The High Court concluded, on the facts, that:

  • neither QD nor CPC had breached its duty to act in utmost good faith, which, in this context, was to:
  • adhere to the spirit of the contract;
  • observe reasonable commercial standards of fair dealing;
  • be faithful to the agreed common purpose; and
  • act consistently with the justified expectations of the parties (and therefore must be looked at within the commercial context); and
  • QD was not in breach of its obligation to use all reasonable but commercially prudent endeavours. The precise meaning of all reasonable endeavours is still unclear – it would appear to sit somewhere between "reasonable endeavours" and "best endeavours" but does not always require a party to sacrifice its own commercial interests (particularly where qualified by such a term as "commercially prudent").

Jet2.com Ltd v Blackpool Airport Ltd

Blackpool Airport Ltd (BAL) entered into a contract with Jet2.com Ltd (Jet2), a low cost airline, pursuant to which the parties would "co-operate together and use their best endeavours to promote Jet2's low cost services from Blackpool Airport". BAL was also required to "use all reasonable endeavours to provide a low cost base to facilitate Jet2's low cost pricing". It was agreed by the parties that "all reasonable" and "best endeavours" had the same meaning in these circumstances, and therefore not considered by the court.

For the first four years of the contract, the airport stayed open outside its published opening hours at a loss, allowing the airline to arrive and depart and therefore provided the flexibility which both parties accepted Jet2 required. After four years, BAL refused to accept arrivals or departures scheduled outside its published opening hours in a bid to improve its profitability.

Jet2 sued for breach of contract. BAL argued that its duties to use best or all reasonable endeavours did not require it to act against its own commercial interest.

Distinguishing this case from previous case law (which suggested that all reasonable endeavours did not include a requirement to act against a party's commercial interests), the judge found that BAL's refusal to accept Jet2's flights outside its scheduled opening hours was a serious breach of contract. The distinguishing factor in this case was the factual matrix and, in particular, that BAL's duties related to matters within its own control (whether to schedule arrivals and departures outside the airport's published opening hours) whereas previous cases had required extortionate expenditure by a party to achieve a result outside its control.

Comment

Although the court may consider legal precedent in interpreting endeavours and good faith clauses, their ultimate meaning will depend on the context and interpretation of the contract itself. As the judge said in the Jet2.com case, "the [endeavours clause] will not always mean the same thing". In the Chelsea Barracks case, the judge said that the obligation to use all reasonable endeavours does not always require the party to act against its commercial interests; in contrast, in the Blackpool airport case, the judge found that BAL's failure to accept flights outside published opening hours was a breach of BAL's obligations (even though keeping the airport open outside published opening hours was against BAL's commercial interest).

Contracting parties tend to apply a 'sliding scale' of obligations; absolute; best endeavours; all reasonable endeavours; and so on – but without necessarily considering what this means. For example, exactly what steps are (or might be) required in order to discharge that obligation. As a result of this uncertainty, as demonstrated by these two recent cases, parties should consider taking practical steps to clarify just how hard a party has to try to meet its obligations. For example:

  • include a definition of the relevant "endeavours" and/or "good faith" clause in the agreement (although this might be difficult, and inordinately complex and time-consuming, to agree); and
  • set out the steps which a party must take to meet the particular obligation (consider including requirements as to incurring of costs and expenditure, applicable time periods, obligation (or not) to take legal action, provision of information, "step-in" rights for the other party and the extent to which a party is entitled to protect its own interests (or act against them)). As a minimum, if it is contemplated that a specific action should (or should not) be undertaken in order to satisfy the relevant endeavours test, then this should be set out clearly.

For existing contracts including such clauses, as a practical matter a party should record the steps it has taken to meet its obligation (which will, at least, assist in defending any accusation that it has not taken any steps at all).

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.

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