#Contract #GoodFaith: High Court finds obligation to use “all reasonable endeavours” to reach agreement with third party was enforceable

High Court finds obligation to use “all reasonable endeavours” to reach agreement with third party was enforceable ~ James Farrell & Michael Barron, Herbert Smith Freehills, 12 May, 2017.

The High Court has upheld a contractual provision requiring a party to use “all reasonable endeavours” to obtain a senior debt facility agreement, rejecting arguments that the clause was too uncertain to be enforced: Astor Management AG v Atalaya Mining Plc [2017] EWHC 425 (Comm).

It is a well-established principle that English law will not enforce a mere “agreement to agree” since, in the absence of objective criteria regarding the agreement to be reached, there is no way to determine what the parties are obliged to do. In Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 817 (QB), for example, the court declined to enforce an obligation in a settlement agreement to use reasonable endeavours to enter into a third party contract (for the restoration of a classic car), as the court could not evaluate whether it was reasonable to refuse to agree to any particular terms on offer.

The present case suggests a greater willingness to enforce an endeavours obligation where the object of the endeavours is a contract with a third party. It does however suggest that the courts will be slow to find that such an obligation has been breached.

Given the uncertainty surrounding these issues, commercial parties negotiating a clause of this sort would be well advised to ensure that the object of the endeavours is clearly defined – so that, so far as possible, there are agreed parameters as to what any agreement should look like – and there is also clarity as to the steps that are (or are not) required to comply with the obligation.

James Farrell and Michael Barron, a partner and associate in our disputes team, consider the decision further below. For more on endeavours obligations, see the sixth in our series of contract disputes practical guides, Endeavours obligations: How hard do you have to try?

Background

The defendants purchased the claimants’ interest in a dormant mining project under an agreement dated 30 September 2008.

The majority of the consideration was deferred and would only become payable (in a number of instalments) once the defendants had (i) received the necessary permits to restart mining activities and (ii) secured a senior debt facility sufficient to restart the mining operations.

The agreement contained an obligation on the defendants “to use all reasonable endeavours” to obtain a senior debt facility and to procure the restart of mining activities on or before 31 December 2010.

In June 2015, the defendants raised the necessary funds to resume mining activities by issuing shares in their parent company instead of obtaining the senior debt facility. They received the necessary permits in July 2015, and mining activities restarted at the end of that month.

The claimants sought payment of the deferred consideration. Their primary argument was that the obligation to pay the deferred consideration had been triggered, on the proper interpretation of the agreement, regardless of whether a senior debt facility had been put in place. In the alternative, the claimants argued that the defendants were in breach of the “all reasonable endeavours” obligation and, if they had complied with it, a senior debt facility would have been put in place. As a variant of that case, they argued that the defendants had acted in breach of implied obligations of good faith.

The court had to consider, amongst other matters, whether there was a legally enforceable obligation to use “all reasonable endeavours” to obtain the senior debt facility, or alternatively whether there was an implied duty of good faith.

Decision

The High Court (Mr Justice Leggatt) held that the obligation to pay deferred consideration had not been triggered, as no senior debt facility had been put in place. Although the “all reasonable endeavours” clause was enforceable, the defendant was not in breach of this obligation on the facts. There was no need to imply a requirement to act in good faith to obtain senior debt finance, as such a requirement was subsumed within the express obligation to use all reasonable endeavours.

The court’s reasoning in relation to the endeavours and good faith issues are considered below.

Was the endeavours obligation enforceable?

The defendants submitted that an endeavours obligation would only be enforceable if (a) the object of the endeavours was sufficiently certain and (b) there were sufficient objective criteria by which to evaluate the reasonableness of the endeavours. They relied on comments in Dany Lions to the effect that it was likely to be only in “exceptional” cases that these requirements could be satisfied if the object was a future agreement with a third party. The defendants argued, in particular, that requirement (b) was not satisfied here because there were no objective criteria by which the court could judge the reasonableness of any endeavours to obtain a senior debt facility.

Leggatt J rejected these submissions, saying he could not agree with suggestion in Dany Lions that the requirements of certainty of object and sufficient objective criteria are difficult to satisfy and will not usually be satisfied where the object of an undertaking to use reasonable endeavours is an agreement with a third party. He went on to say:

“Far from being ‘exceptional’, I would say that it should almost always be possible to give sensible content to an undertaking to use reasonable endeavours (or ‘all reasonable endeavours’ or ‘best endeavours’) to enter into an agreement with a third party.”

The object of the endeavours is sufficiently certain, as there is no difficulty in assessing whether or not an agreement had been entered into. Whether the relevant party has endeavoured to make such an agreement is a question of fact within the court’s capacity to decide.

Leggatt J noted that a lack of objective criteria could make it difficult to prove a failure to use sufficient endeavours. However, this was not sufficient to make the clause unenforceable. Where the parties have adopted a test of “reasonableness”, they are inviting the court to make a value judgment.

In the present case, the fact that there may have been many different forms which the senior debt facility could take did not make the object of the endeavours insufficiently certain or excuse the defendants from making any effort at all to obtain any form of senior debt finance.

Nor did the court accept that there were no objective criteria by which the reasonableness of the endeavours could be judged. Leggatt J commented that a court would be very slow to second-guess a commercial party on matters of commercial judgment, and therefore in many circumstances it may be extremely difficult or impossible to show that a party ought reasonably to have taken steps it did not take. But that did not mean the obligation was unenforceable.

Was there a breach of the endeavours clause?

On the facts, the court held that the defendants had not breached the obligation.

The extent to which a party can have regard to its own financial interests when using best (or all reasonable) endeavours depends on the terms of the agreement. Here, it was clearly in the defendants’ financial interests to fund the restart of the mining operations without obtaining a senior debt facility, as this would avoid triggering the payment of deferred consideration.  But this could not in itself be a legitimate reason to do so, as it would frustrate the purpose of the endeavours clause.

However, it did not follow that financial considerations were irrelevant and the defendants were required to try to obtain a senior debt facility at any cost – for example if it would make the project commercially unviable. On the facts, there was no evidence that there was a viable funding option that the defendants should have identified and pursued. Accordingly, the claimants had not established a breach of the endeavours obligation.

Was there a breach of an implied duty of good faith?

The claimants argued that the agreement contained an implied duty on the defendants to act in “good faith” in using all reasonable endeavours to obtain a senior debt facility.

Leggatt J referred to his discussion of implied duties of good faith in Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB) (considered here) – a decision that is generally seen as the high water mark for implied duties of good faith in English law. However, he commented, this case was not the occasion to explore the question further.

He said that a duty to act in good faith, where it exists, is a modest requirement, which does no more than reflect the expectation that a contracting party will act honestly and not seek to frustrate the purpose of the contract. That is less onerous than a positive obligation to use all reasonable endeavours to achieve a specified result. On this basis, any implied requirement to act in good faith was subsumed in the express requirement to use all reasonable endeavours.

 

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