- 2 mins read
An obligation to use ‘reasonable endeavours’ generally requires a party to take a single, reasonable, course of action to achieve the stated objective, even if other courses of action are available (Rhodia International Holdings Limited v Huntsman International LLC  EWHC 292).
The Court of Appeal in Gaia v Abbeygate Helical  EWCA Civ 823 was asked to provide guidance on a ‘reasonable endeavours’ obligation in the context of an overage payment totalling £1.4 million (the Overage Payment) subject to the satisfaction of certain conditions.
Under the ‘reasonable endeavours’ clause Abbeygate Helical (Abbeygate) had an additional obligation to satisfy the relevant conditions ‘as soon as reasonably practicable’. The relevant conditions were the acquisition, and then variation, by Abbeygate of a number of different legal interests that would allow the development to take place. The contract also contained a longstop date (4 July 2013) after which the obligation to make the Overage Payment lapsed, irrespective of whether the conditions were fulfilled.
Initially, the High Court found that Abbeygate was in breach of the obligation to use reasonable endeavours because they had intentionally delayed satisfaction of the conditions until after the longstop date. Abbeygate appealed on various grounds, but principally that the obligation to use ‘reasonable endeavours’ allowed it to take account of its own commercial interests when deciding how it the satisfied the conditions – specifically, its ability to obtain funding for the development. Abbeygate submitted that it would be ‘absurd’ to commit to the steps required to satisfy the conditions, without first securing the funding required to honour the commitments.
Dismissing the appeal, the Court of Appeal found that Abbeygate had ‘manipulated [the timetable to satisfy the conditions] to take the satisfaction of the necessary conditions…beyond 4 July 2013’. They found that the restriction on access to funding was ‘self-imposed’ by Abbeygate to avoid the obligation to make the Overage Payment. This, the Court said, was ‘on any view’ a breach of the reasonable endeavours obligation.
As such, the Court of Appeal awarded Gaia the sum of £1.4 million.
Following the decision, parties entering into contracts which include overage provisions and/or clauses with ‘reasonable endeavours’ provisions should generally:
- Make provision in the contract so that liability cannot be avoided by the ‘dragging of feet’ - e.g. by including an obligation to satisfy conditions ‘as soon as reasonably practicable’;
- Be aware that the Court will not be impressed with a party that has deliberately delayed the achieving of a condition in order to avoid making an overage payment;
- Take professional advice at an early stage, if it appears that a party is in breach of a reasonable endeavours obligation and/or is deliberately delaying satisfaction of contractual conditions to avoid liability.