All kinds of strategies and tactics come into play when negotiating commercial contracts. At the beginning of any business relationship it’s crucial to be clear about what your priorities are. What obligations are you prepared to assume under the contract? What benefit (or ‘consideration’) do you want to receive in return? Remember the most effective commercial relationships are the ones that are durable. So at the outset it’s always worth getting legal advice from a specialist contract lawyer.
In our work we often come across situations where a company has over -committed. There’s been a failure to think through the long-term consequences of a specific contractual undertaking. Here we look at two common contractual obligations – so-called ‘endeavours’ clauses and the duty to act in ‘good faith’, and we examine the consequences of failing to act in accordance with such clauses.
The award-winning commercial lawyers at the Bahamas law firm ParrisWhittaker offer specialist advice on commercial contracts. This includes advice on the extent of specific obligations in the event of a contractual dispute.
What Are ‘Endeavours’ Clauses In Commercial Contracts?
Most clauses in a contract contain a commitment to fulfill an obligation or series of obligations. Failure to meet the obligation will usually result in a breach of contract and all the legal consequences that brings. ‘Endeavours’ clauses are different. Under such clauses a party commits to attempt to fulfill the relevant obligation – and to make every effort to do so. The level of effort required to comply with the endeavours clause will depend on whether the clause requires the party to use ‘best’, ‘reasonable’ or ‘all reasonable’ endeavours.
The distinction between the different types of endeavours clauses can sometimes be unclear. It’s why such clauses often fall to be interpreted by the courts when the parties to a contract disagree or are not on the same page when it comes to the responsibility envisaged by the clause.
When examining endeavours clauses the courts will use the tried and tested rules of construction of contractual terms. Judges will therefore take into account the wider context of the contract:
What was the position of the parties when the contract was formed?
What was the purpose of the contract?
Is a particular interpretation of the endeavours clause consistent withe the other terms of the agreement?
What Is Good Faith?
Under English contract law, there is no general duty to act in good faith. That said, in the commercial contracts we negotiate and are asked to interpret (in the
event of a dispute) a good faith obligation is commonly expressly included in the contract.
Where there’s an express duty to act in good faith the have said good faith involves a duty:
To proactively try to prevent any action that would frustrate the contract
To disclose all material facts to the other party
Not to encourage the other party into believing something is false
Not to provide erroneous information that the other party will rely in
It’s possible too for the courts to imply a duty of good faith if, without such a duty, the contract would lack commercial or practical sense.
The Brooke Homes Case (2021)
The English High Court case of Brook Homes (2021) deals with both the good faith principle and endeavours clauses in contracts. Like all decisions of the English courts the ruling is likely to have a bearing on how the courts in the Bahamas look at these issues in future.
The case centered on the development of a new ‘eco town’ in the English county of Oxfordshire. Overall the proposed new town was to be made up of 6,000 dwellings. The Brooke Homes case related to the purchase of land on which 1700 of these dwellings would be built. A company known as Portfolio Property owned the development land and entered into an agreement with Brooke Homes, a building company). Under the agreement the parties:
Were obliged to use ‘all reasonable endeavours’ to enter a conditional sale agreement for a portion of Portfolio’s land that Brooke Homes would then develop; and
Agreed that these efforts or endeavours were to continue during an exclusivity period; and
Agreed to act in good faith in their dealings with one another
Under a conditional sale agreement a buyer commits to buying land or another asset subject to certain conditions being fulfilled. Here, Portfolio and Brooke Homes agreed they would enter an agreement for sale if:
Planning permission was obtained; and
Portfolio found a suitable commercial site on which Brooke would be able to construct the housing pods they wished to use in the development.
As things turned out the conditional sale agreement was never entered into. After three years Brooke issued proceedings, arguing that Portfolio had breached its agreement to use all reasonable endeavours (to reach the conditional sale). Brooke also argued that Portfolio had not, as required, acted in good faith. The courts agreed with Brooke. In doing so the court explained what the different
types of endeavour clauses commonly found in commercial agreements mean:
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 the party may also have to, depending on the context, sacrifice some commercial interests.
After examining the precise wording of the contract and looking at the overall commercial context of the agreement the court concluded that Portfolio had failed to use all reasonable endeavours and hadn’t acted in good faith in its dealings with portfolio. On the issue of good faith the court explained it meant:
Acting honestly as judged by reasonable and honest people
Observing reasonable commercial standards of fair dealing
Being faithful to the overall purpose of the contract
Acting consistently with the justified expectations of the parties
Evidence of the lack of reasonable endeavours and good faith included:
The fact that Portfolio never actually identified which portion of land would be the subject of the conditional sale agreement, and never provided a reason for this failure.(The court concluded this could have been done reasonably given the passing of three years since the signing of the agreement)
There was email evidence that Portfolio wanted out of the agreement it had reached with Brooke Homes for commercial reasons. Essentially it appeared that they wanted to enter an agreement with another developer. This demonstrated they were not acting faithfully as regards the agreement with Brooke Homes.
Best endeavours and good faith clauses are commonplace in commercial agreements. The Brooke Homes case is a cautionary tale of how these principles can bind reluctant parties.
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