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“Endeavours” Clauses – Back in the Spotlight

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While there has been a large amount of case law over the years about what is meant by “best endeavours” and “reasonable endeavours”, it has not always provided the clarity we need, as solicitors, to advise clients with certainty.  However, the recent cases of EDI Central Ltd –v- National Car Parks Ltd [2010] CSOH 141 and CPC Group Ltd –v- Qatari Diar Real Estate Investment Company (2010) Cattles EWHC 1535 have provided some useful guidance.

In the case of EDI Central Ltd –v- National Car Parks Ltd [2010] CSOH 141, the Scottish Court of Session (the “SCS”) considered the effectiveness of “all reasonable endeavours” and “good faith” clauses. The SCS held that where a party is under the obligation to use “all reasonable endeavours”, it is not required to continue trying to comply if it becomes apparent that any further efforts would be fruitless. Essentially, there is a cut off point in situations where the obstacles are insurmountable.  Further, in the judge’s obiter, it was noted that the party might find itself in a similar situation where it is under a “best endeavours” obligation because “it is difficult to conceive that an obligation to use best endeavours requires a party to take steps which are unreasonable”.  Taking a very pragmatic approach, the judge speculated that, depending of the circumstances of the case, the affected party might inform the other party of its difficulties to see whether that other party could suggest a solution.

The SCS also looked at the effect of a “good faith” clause, providing that this imposed a duty to observe reasonable commercial standards of fair dealing, faithfulness to the agreed common purpose and consistency with the justified expectations of the other party. Accordingly, the combined effect of an “all reasonable endeavours” obligation and a “good faith” clause was the requirement of the party to genuinely “do their best to achieve the desired result and not merely to go through the motions”.   While this is a Scottish case, the reasoning behind the judgment is similar to that in CPC Group Ltd –v- Qatari Diar Real Estate Investment Company (2010) Cattles EWHC 1535, where a great deal of emphasis was put on the commercial realities of business. 

This case concerned a joint venture company, which was formed between CPC Group Limited (“CPC”) and Qatari Diar Real Estate Investment Company (“Qatari”), to buy and develop part of Chelsea Barracks (the “Site”). CPC sold its interest in the Site to Qatari for initial and deferred consideration totalling a maximum of £81m.  The payment of the deferred consideration depended, to a large extent, on Qatari obtaining planning permission for the Site.  Qatari owed CPC various obligations including one to use “all reasonable but commercially prudent endeavours” to achieve the thresholds for the payment of the deferred consideration.  Unfortunately, the planning application ran into significant problems when the Prince of Wales intervened stating that he found the designs too modern and favoured something more traditional.  When Qatari withdrew the planning application CPC contended that this was in breach of Qatari’s obligations under the share purchase agreement. 

In reaching its decision, the court found that Qatari had not been in breach of its endeavours obligation (although it decided that Qatari was in breach of the contract in other respects).  The court took the pragmatic approach that an obligation to use “all reasonable endeavours” does not always require the person under the obligation to “sacrifice his own commercial interest”.  The court considered that the situation was made even clearer in this case because of the use of the wording “but commercially prudent”.  The court found that Qatari was only expected to take all reasonable steps to procure planning permission as long as those steps were commercially prudent.

This case, together with the SCS case, illustrates that the courts consider the commercial realities and overall factual matrix of a case when determining the scope of endeavours clauses.  It is clear from these cases that the courts do not expect a party, who is under an “all reasonable” or “best endeavours” obligation, to take unreasonable or uncommercial steps when attempting to comply with such an obligation.

If you have queries, or require further information, about any aspect of this article, please feel free to call Matthew Hattersley on 0113 336 3351 or Victoria Lethaby on 0113 336 3324.

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