|July 17, 2012|
Previously published on July 2012
A construction company (T) agreed with a property developer (A) to construct a series of residential blocks on A's land. T agreed to use "reasonable endeavours to procure completion... by the Target Date". The 'Credit Crunch' intervened and T was unable to obtain sufficient funding to maintain the progress of works and suspended work. T claimed that suspension of the work was not a breach of contract if it arose as a result of lack of finance provided that it had used reasonable endeavours to obtain adequate funding and had been unable to do so.
In Ampurius Nu Homes Holdings Ltd -v- Telford Homes (Creekside) Ltd  EWHC 1820 (Ch), Roth J held that the obligation was not limited in this way and so, if the only reason work was suspended was lack of funding, that was no defence and T was in breach of its obligations.
The Judge's explanation of this part of his decision was brief, perhaps because it was not strictly necessary because he had already decided the case on other grounds, but this part of his judgment is most unlikely to provide practitioners with helpful guidance as to the circumstances in which endeavours covenants will be enforced, guidance which would have been welcome following the Court of Appeal decision in Jet2.com Ltd -v- Blackpool Airport Ltd  EWCA (Civ) 417.
He decided that "reasonable endeavours" was "designed to cover matters that directly relate to the physical conduct of the works... such... as inclement weather or shortage of materials for which the Defendant was not responsible" and that the obligation was otherwise "absolute".
The Judge did not explain his reasoning for reaching that conclusion and his analysis of authority was limited to a brief dismissal of the first instance decision in Yewbelle Ltd -v- London Green Development Ltd  EWHC 3166 (Ch) is not providing "any assistance in the very different circumstances of the provision at issue in this case". Whilst it is correct that Moore-Bick LJ adopted an essentially similar approach to a number of authorities in his Jet2.com judgment, it is unfortunate that the distinguishing characteristics of the contracts in these other authorities were not identified.
In Yewbelle, one of the issues which arose was whether it was necessary for a party to purchase an additional parcel of land in order to comply with its obligations. The Court of Appeal decided that that was not part of an "all reasonable endeavours" obligation. It is possible that the Judge had in mind that, whereas the need for expenditure in Yewbelle had not been anticipated at the time of contracting, in the present case it must surely have been contemplated that the party required to undertake work would be required to fund that work. However, this was not explained.
The level of investment required for compliance with an endeavours covenant and in particular the extent to which compliance might require a financial burden to be assumed has been the subject of much judicial and other debate. Jet2.com made clear that, at least in relation to a "best" endeavours covenant (and probably an "all reasonable" endeavours obligation) a significant financial burden may be assumed by this wording.
At least in some quarters it had been understood that the weaker "reasonable" endeavours obligation did not require a financial sacrifice: an understanding derived from e.g., Rhodia International Holdings Ltd -v- Huntsman International LLC  EWHC 292 (Comm), at paragraph 35 (citing the first instance decision in Yewbelle) and the decision of the Court of Appeal in Phillips Petroleum Co UK Ltd -v- Enron Europe Ltd  CLC 329, particularly section 9 of Kennedy LJ's judgment.
A party that has undertaken a reasonable endeavours obligation cannot safely proceed on the basis that the need to undertake a financial burden will provide a defence to a claim for a breach of that obligation. Indeed, the effect of Roth J's judgment was that a "reasonable endeavours" covenant imposed an absolute obligation to arrange applicable funding to withstand the financial burdens of the contract.
Parties faced with this issue will no doubt wish to scrutinise very carefully the extent to which they can argue that the contract does not provide sufficient objective criteria to render a reasonable endeavours covenant sufficiently certain to be an enforceable. This was not considered in Roth J's judgment, but in light of the treatment of this question by the majority in Jet2.com (and perhaps particularly the trenchant dissenting judgment) this issue, which is far from settled, is likely to form a prominent part of case analysis for some time to come.