Brooke Homes v Portfolio (2021) – How reasonable is your reasonableness?
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Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd [2021] EWHC 3015 (Ch)
Summary
A recent decision in the High Court clarified both the meanings of ‘good faith’ and ‘reasonable endeavours’, helping pave the way forward for businesses when entering into contracts. The case also emphasises that parties will be bound by any pre-agreements made before a final contract and a breach of the terms of a pre-agreement can lead to a successful claim of damages from the party who has suffered loss. It is important to note that this is a High Court case, and merely clarifies the existing precedent set.
Introduction
Portfolio Property Partners (PPP) had acquired approximately 500 acres of land in Bicester in order to construct an ‘eco-town.’ There were discussions between PPP and Brooke Homes (BH) regarding BH acquiring approximately 100 acres of the land, in order for BH to build residential properties. The parties entered into various agreements; Exclusivity Agreement, Heads of Agreement and a Conditional Sale Agreement. In summary these stated that BH would purchase 100 acres of land from PPP at £800,000 an acre, with intention of further options being acquired over the remaining land. They also agreed an immediate non-refundable deposit of £250,000 from BH to PPP which was subsequently paid. Ultimately, PPP found an alternative purchaser who they preferred to undertake the contracts with, and they set up a separate company, CFJL, in order to do so. BH were aware of this, but PPP made various reassurances that these separate discussions would not affect the agreements already in place between PPP and BH. This was not the case. Eventually, after years without progression, relations broke down between PPP and BH. Attempts to settle failed when PPP failed to pay BH, and court proceedings were brought by BH for an order of specific performance of the pre-agreements and damages in relation to the breach of contract by PPP.
Key legal issues
- Were the pre-contractual agreements enforceable contracts for BH to be able to claim an order of specific performance?
- Had PPP acted in good faith?
- Had PPP used ‘reasonable endeavours to adhere to the terms of the pre-agreements?
- Could BH claim for loss of chance?
- Was the “corporate veil” lifted due to the advantage caused by the introduction of CFJL?
- Was there a third-party breach?
Judgment
The pre-contractual agreements did fall short of enforceable contracts for sale and therefore could not be subject to an order of specific performance. This was because no definitive identification and provision of plans which identified the land to be sold and annexed in the contract, and the relevant property matters (plans and transfer deeds) has not been attended to.
However, even where there is the case, the parties will still be bound by the terms of the agreements, as they had started to act in accordance with the terms. As a result, a failure to adhere to the terms of the pre-agreements can result in breach of contract, for which damages can be claimed.
In regard to acting in ‘good faith’, the courts clarified that the duty of good faith required four things:
- A duty to act honestly, judged by reference to reasonable and honest people;
- The observation of reasonable commercial standards of fair dealing;
- Fidelity or faithfulness to the common purpose, or contractual purpose; and
- More generally to act consistently with the justified expectations of the parties.
The courts here held that PPP had not been acting in good faith as they had been in various discussions with other third parties and failed to communicate this with BH. They also failed to keep them informed with relevant progress regarding the land or planning permission and gave them no reassurances as to either, despite stating they would do so in the pre-agreements. The courts held that the believe PPP did not act in good faith for the sole purpose that they wished to continue the contract with the third party.
In regard to defining ‘reasonable endeavours’, the court distinguished between three following meanings [97]:
- ‘Reasonable endeavours’ – ‘which might mean if one reasonable path is taken then the obligation is discharged’.
- ‘All reasonable endeavours’ – ‘normally interpreted as requiring all reasonable paths or actions to be exhausted’.
- ‘Best endeavours’ – while this is often the same as ‘all reasonable endeavours’ [1], these two phrases can sometimes be distinguished. ‘Best endeavours’ may ‘be said to require, depending on their context, the sacrifice of some commercial interests on the part of the party, whereas an obligation to use all reasonable endeavours is probably less likely to do so’ [2].
The court made it clear that the precise requirement will depend on the precise wording and context used within the agreement. In this case, the wording ‘all reasonable endeavours’ was used, and the courts stated because of this active endeavour was required, and that passivity or inactivity is likely to be construed as a potential breach. Because PPP failed to progress the discussions with BH and instead decided to pursue the contract with a third party without communicating this with BH, PPP did breach their obligation to use ‘all reasonable endeavours’.
As a result of the breach of the requirements of ‘good faith’ and ‘all reasonable endeavours’, BH could claim damages. In addition, due to the failure to finalise the Conditional Sale Agreement and the decision of PPP to pursue the contract with a third party, they could also claim damages for loss of chance.
The courts found that CFJL was ultimately an extension of PPP, and that the company was also set up in order to make the alternative contract with the third party (likely in an attempt to avoid a breach of contract with BH) the corporate veil could be lifted [3]. Although they would not apply the evasion principle to make CFJL personally liable (stating that this would be a waste of court resources) they did state that PPP and CFJL would be considered as one group in order to state that PPP had ultimately entered into the agreement with the third party, to emphasise the breach of good faith and all reasonable endeavours.
The court held that there was no breach by the third party, as they were unaware that entering into a contract with PPP would involve a breach of BH’s rights, nor where they reckless in doing so.
Application
Where your business has entered into an agreement prior to signing a final contract, your business will be bound by the terms of those agreements and failure to adhere to the terms can lead to a breach. Furthermore, and rather unsurprisingly, your business must be careful when drafting or reviewing contracts. The general contractual nuances such as ‘best endeavours’ should not just be viewed as legal litter; they are consequential and should be considered. Despite this being fairly obvious on paper, in practice it is often easy to gloss over these as ‘standard terms’ and fail to consider their true effects. Your business should recognise that statements such as ‘reasonable endeavours’ and ‘best endeavours’ are not interchangeable and will impose different obligations on your business. Finally, although the courts are usually extremely reluctant to pierce the ‘corporate veil’, they will do so where parties have acted without good faith.
[1] This interpretation was established in Overseas Buyers v Granadex [1980] 2 Lloyd’s Rep 608 [613]; Rhodia International v Huntsman International [2007] EWHC 292 as per Flaux J.
[2] Yewbelle Ltd v London Green Developments [2007] EWCA Civ 475, [2008] 1 P & CR 279, [2007] 23 EG 164 (CS) at [29], and per Vos J (as he then was) in CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010] EWHC 1535 (Ch) at [252]
[3] See Prest v Petrodel Resources Ltd [2013] UKSC 34.
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