Promises, promises
The courts should not allow the party bound under a “best endeavours†agreement to get out of it simply because it has become commercially uninteresting, says Stephen Bickford Smith
Obligationd within contracts under which one party promised to endeavour to cause a certain thing to happen was seen in the cases of Yewbelle Ltd v London Green Developments Ltd and Rhodia International Holdings Ltd v Huntsman International LLC. They raise the important question of how far that party is bound to make such endeavours even where it is not in his commercial interest to do so.
A question of facts
In Yewbelle a contract for the sale of land provided for the seller to use all reasonable endeavours to obtain an agreement with the local authority under s106 of the Town and Country Planning Act 1990. The buyer was not bound to complete until this agreement was obtained. After a year during which no agreement was obtained, due essentially to prevarication by the local authority, the seller started proceedings claiming the contract had ended automatically as it had used best endeavours for a reasonable time. Alternatively, it argued that it was implicit in the contract that despite reasonable endeavours having been used for a reasonable time, the s106 agreement was not forthcoming. The seller could bring the contract to an end if having given due notice to the buyer, he then did not waive the condition.
The buyer on the other hand contended that the contract did not end automatically but continued, allowing the buyer to waive the condition and sue for specific performance.
At first instance, Yewbelle [2006] EWHC 3166 (Ch), Lewison J held that the seller had not made all reasonable endeavours to obtain the s106 agreement, and so dismissed the seller's claim. He held, citing Phillips Petroleum v Enron [1997] CLC 329 that the seller was not obliged to sacrifice its own commercial interests as part of those endeavours, on the ground that it had not pursued negotiations with the local authority sufficiently vigorously. Had he found that all reasonable endeavours had been used, he would have accepted the contract could be ended by the seller on the basis of the implied term argued for by the seller after due notice to the buyer and the buyer not waiving the s106 agreement stipulation.
The Court of Appeal in Yewbelle [2007] EWCA Civ 475, on the seller's appeal, reversed Lewison J on the basis that it considered that on the facts the seller had used all reasonable endeavours, holding that the obstacle which remained to the conclusion of the s106 agreement was the insistence of the local authority that it included an area of land belonging to a third party: the seller could not reasonably have been expected to take any step to procure the inclusion of this land in the agreement.
Opinions will differ on whether the Court of Appeal's approach was justified, given that Lewison J, an experienced property lawyer, had fully appreciated and dealt with this argument. In general, the Court of Appeal should not interfere with a finding of fact unless it is plainly unsustainable (see Assicurazioni Generali v Arab Insurance Group [2003] 1 WLR 577).
In Rhodia International Holdings Ltd v Huntsman International LLC [2007] EWHC 292 (Comm) the question at issue was whether a purchaser of manufacturing facilities had used reasonable endeavours to obtain the consent of a third party supplying heat and power to the site to novation of an energy supply contract to itself.
The judge, Julian Flaux QC (Now Flaux J) held firstly that an obligation to use reasonable endeavours fell short of one to use best endeavours, in that the former required some reasonable course to be pursued but the latter required all such courses to be taken. He went on to hold, following Yewbelle at first instance (the Appeal in that case not having been heard), and Phillips, that the party required to use reasonable endeavours was not required to sacrifice his own commercial interests.
However, he added the caveat that 'where the contract actually specifies certain steps have to be taken. . . as part of the exercise of reasonable endeavours, those steps will have to be taken, even if that could on one view be said to involve the sacrifice of a party's commercial interests'. He held that the purchaser had failed to use reasonable endeavours in failing to provide a parent company guarantee or similar security to the power supplier, the purchaser being a special purpose vehicle with limited resources and no trading history. The decision seems to accord with commercial common sense. But in reaching it the judge had to disregard in practice the principle said to originate from the Phillips case that reasonable endeavours does not require a party to sacrifice his own commercial interests. So what did Phillips actually decide?
In Phillips a long term contract for the supply of gas required the parties to use reasonable endeavours to agree the dates when their facilities would be commissioned and ready to operate. There was provision for long-stop dates. Enron, the buyer of the gas, to suit its own financial interest related to the market price of gas being lower than the price it had agreed to pay Phillips, refused to agree any dates.
Phillips argued that the parties were obliged to use their best endeavours to agree such dates subject only to criteria of technical and operational practicality. Colman J accepted Phillips' case, and made declarations that it would be a breach of contract for Enron to refuse or fail to agree a commissioning date because of the market price being lower than the price payable under the contract, or for any reason other than one based entirely on technical or operational practicality of the proposed commissioning date.
A majority of the Court of Appeal, (somewhat bizarrely it may be thought) disagreed. They held that the obligation was one which was subject to the principle laid down in May & Butcher v R [1934] 2 KB 17 to the effect that a contract to negotiate is not enforceable. Hence, in the instant case, there was no obligation on the buyer to disregard the financial effect on him when considering whether to agree a date.
Differences in agreement
The weaknesses of the decision was that there is a difference between an agreement to agree and an agreement to endeavour to fix matters outstanding in an already concluded contract. In Sudbrook Trading Estate v Eggleton [1983] 1 AC 444 the House of Lords upheld the enforceability of a term in a lease allowing the tenant to purchase the freehold at a price to be determined by valuation. Secondly the Court ignored the cases qualifying May & Butcher, beginning with Hillas & Co v Arcos [1932] 43 Ll Rep 359, and including Mallozzi v Carapelli [1976] 1 Ll Rep 407, another case involving an agreement to negotiate, which stress the that an agreement should be upheld where possible.
More fundamentally, the decision strikes at the heart of long term contracts by allowing parties to escape their obligations by frustrating contractual mechanisms designed to co-ordinate those obligations, and then claim that as those mechanisms constituted merely an agreement to agree their obligations are unenforceable at law.
Interestingly, in Yewbelle at first instance Lewison J noted that it was not contended that the agreement he was considering was unenforceable, but nevertheless held that Phillips provided guidance on the extent of the obligation to use best endeavours. This seems very questionable. Even if Phillips was correctly decided, it was not concerned with a contractually enforceable obligation to use reasonable endeavours.
There seems to be no reason why such an obligation should not require the party bound to disregard its financial interest, certainly if the alternative is to allow it to escape from the contract merely because it has ceased to be financially attractive. It is suggested that the obligation to use reasonable or best endeavours requires reasonable or all reasonable steps to be taken to produce the result the contract contemplates.
Clearly the extent of any financial sacrifices in carrying out those steps may be a factor in deciding what is reasonable, but it cannot be right that the party concerned can frustrate the deal because he thinks it is no longer profitable.
Would the seller in Yewbelle have been entitled to refuse to attempt to negotiate the s106 agreement merely because another prospective buyer had appeared offering a higher price?