Endeavouring to negotiate in good faith
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Portfolio Property Partners planned to construct a 500-acre “eco-town” outside Bicester, Oxfordshire. It acquired land and began the planning application process to do so.
Portfolio entered into three agreements with Brooke Homes, a developer. Under these the parties agreed:
- to use all reasonable endeavours to enter into a conditional sale agreement for an initial 100 acres of land for development by Brooke;
- to continue these efforts during an exclusivity period; and
- to act in good faith towards each other for the duration of the three agreements.
When no conditional sale agreement had been executed after three years, Brooke issued proceedings.
The court held Portfolio had neither used all reasonable endeavours nor acted in good faith for the duration of the agreements.
All reasonable endeavours
The court summarised the general position on the three typical types of endeavours clauses:
- Reasonable endeavours: if one reasonable path is taken then the obligation is discharged.
- All reasonable endeavours: all reasonable paths or actions should be exhausted. Passivity or inactivity is likely to be construed as a potential breach.
- Best endeavours: all reasonable paths or actions should be exhausted but you may also have to, depending on the context, sacrifice of some commercial interests.
However, as ever, the precise requirement will depend on the particular wording and context. Therefore, “all reasonable endeavours” may sometimes require subordination of commercial interests.
The court explained that a given action is a reasonable endeavour where it has a significant or substantial chance of achieving the desired result. Therefore, an overwhelming obstacle to achieving the desired result may discharge a party from using reasonable endeavours.
Like endeavour clauses, a “good faith” obligation takes colour from the other terms of the agreement. Absent anything to the contrary, as in this case, good faith requires:
- acting honestly as judged by reasonable and honest people;
- observing reasonable commercial standards of fair dealing;
- fidelity or faithfulness to the common or contractual purpose; and
- acting consistently with the justified expectations of the parties.
The court concluded that Portfolio was not using all reasonable endeavours nor acting in good faith because:
- it did not identify or provide plans which identified the 100 acres to be sold to Brooke. This could reasonably have been done and there was no adequate explanation from Portfolio as to why this did not occur. By the time in question, there was no excuse for the failure to identify the land to be transferred; and
- after three years, it was clear from email evidence that Portfolio no longer wished to be bound by the agreements for commercial reasons. By this time, they were not acting with fidelity or faithfulness to the common purpose contemplated by agreements and had a clear preference to move discussions forward with third parties.
Damages were awarded on the basis of the loss of a chance of securing a conditional sale agreement on beneficial terms.