REUTERS | Jason Lee

Using all reasonable endeavours to commit commercial suicide

The extent to which a party may be obliged to sacrifice its own commercial interests in complying with an “endeavours” obligation in a commercial contract is an issue to which there is no easy answer. A different but related issue was considered in two recent cases: whether a party who is in financial difficulty can rely on an “endeavours” provision to avoid other contractual obligations.

In Morris Homes (West Midlands) Ltd v Keay and another the claimant had suspended work on the construction of a medical centre because the recession had rendered the project unviable. The prospective tenants of the development, the Keays, alleged that this breached the parties’ agreement for lease, which included separate clauses requiring the developer to commence and thereafter diligently carry out the Works (clause 3.1) and to use all reasonable endeavours to ensure that the Works are completed as soon as reasonably practicable (clause 4).

The claimant argued that the obligation under clause 4 did not oblige it to commit commercial suicide and, if it was not in breach of clause 4, then it followed that the obligation to execute the works diligently was also satisfied because the extent of “diligence” under clause 3.1 did not require the claimant to take steps beyond “all reasonable endeavours” under clause 4.

The dispute was referred to arbitration and the arbitrator found in favour of the defendants. On appeal the judge agreed with the arbitrator. They said Morris Homes had three distinct obligations:

  • It was obliged to commence the works as soon as was reasonably practicable.
  • Once the works had been commenced, it was obliged to carry them out diligently.
  • It had to use all reasonable endeavours to ensure that the works were completed as soon as was reasonably practicable.

None of these obligations was expressed to be subject, or subsidiary, to any of the others, and effect had to be given to each one of them separately from the others.

Arguably, by stopping work the claimant was using all reasonable endeavours to secure its financial future in order to preserve the possibility of the works being completed at some undetermined date in the future. However, in stopping work for over a year it was quite clearly in breach of its obligation to carry out the works diligently once they had been started. It could not avoid liability under clause 3.1 by establishing that it had complied with clause 4. The judge considered that this was in line with the reasoning of the first instance court in Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd on this particular point (which was not the subject of the recent Court of Appeal decision in that case).

Development agreements and construction contracts often include both an obligation to carry out the works with diligence and an obligation to use reasonable/all reasonable/best endeavours. Both this case and Ampurius Homes have been criticised as requiring developers to spend money they don’t have in completing projects, at the risk of becoming insolvent. So how will these provisions, and the inter-relationship between them, be interpreted going forwards?

Endeavours obligations

One of the problems in interpreting “endeavours obligations” is that they mean different things in different contexts. In Ltd v Blackpool Airport Ltd, the Court of Appeal was clear that when a party is obliged to use all reasonable endeavours related to obtaining something from a third party, it is not required to sacrifice its own commercial interests. However, the position is different where the parties have assumed commercial and risk-bearing obligations as part of a venture with each other, for example in relation to a development project, as in this case. In this scenario, the extent to which a party is required to sacrifice its own commercial interests is entirely dependent on the relevant context.

In this case the medical centre project depended entirely on securing the services of a particular doctor and putting in place a Primary Care Trust agreement to fund the rent as soon as possible. Both parties were aware of this. The claimant’s interpretation meant that it was entitled to suspend the project indefinitely by reason of its own financial problems without being in breach of contract. There was nothing the defendants could do, however long the suspension continued. They would remain bound to take a lease of the completed shell and core whenever it was completed, and to fit it out as a medical centre, whether or not there was by then any doctor willing and able to take an underlease of it. Unsurprisingly, the court did not accept this interpretation.

The inter-relationship issue

Even if the claimant had complied with clause 4, that was not enough. It was still in breach of its obligation under clause 3.1. The court was very clear that different considerations arise in connection with a “reasonable endeavours” obligation to complete works as compared with a separate obligation to carry out works with diligence. A party in the claimant’s position could well comply with a reasonable endeavours obligation to complete works (by taking reasonable endeavours to ensure that it has sufficient capital and other management resources available), but be in breach of an obligation to carry out the works diligently because, for example, it failed to programme the works appropriately. “Diligence” in a construction or development contract means both due care and “due assiduity/expedition”. (That phrase was used in Ampurius Homes, while a similar sentiment was expressed by Simon Brown LJ in West Faulkner Associates v London Borough of Newham.)

This must surely be the right approach. From a claimant’s perspective, it would be pretty frustrating to find out that you have no claim in damages against a contractor who has downed tools because it has run out of money, notwithstanding an express provision to carry out the works diligently. In addition, the general attitude of the English courts has always been that a lack of funds is not, without more, an excuse for a failure to perform under a contract. Arguments that a contract has been frustrated due to economic difficulties or a financial crisis which make it more expensive or even impossible to perform under a contract are usually unsuccessful. Although if someone asked me if there was (or ought to be) an implied term that Morris Homes would have the funds in place to carry out its obligations that would be much harder to answer.

Is a party obliged to sacrifice its own commercial interests in complying with an all reasonable endeavours obligation?

The rather unhelpful answer is that it depends. However, what is clear is that a party can weigh up the cost of complying with this type of obligation, but not whether it can actually afford to comply.

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