27 March 2014

Parties facing a dispute are usually well advised to try to reach an agreement to avoid it. Such an agreement has the advantage of being flexible – one of the reasons parties should settle disputes rather than pursue them to court, is that they can agree outcomes which a court cannot give them eg an alternative goods delivery plan or the grant of a loan.

However, parties getting too imaginative can backfire. If part of a deal is something the courts cannot enforce, then, at best, that part of the settlement will not be binding. Examples might include an agreement to do something illegal or something impossible.

More prosaically, the agreement might be to try to do something to avoid the losses being claimed, for example to enter an alternative contract with a third party. Commonly these obligations are phrased as a requirement to use ‘reasonable endeavours’ or ‘best endeavours’ to achieve an outcome. An obligation to use reasonable endeavours to achieve a certain object  is generally enforceable (Jet2.com Ltd v Blackpool Airport Ltd [2012]). However, is an obligation to enter a future contract a sufficiently certain object? In many cases, it seems, no.

Dany Lions v Bristol Cars illustrates this and reminds parties to exercise some caution in how flexible a settlement can be. In essence it boils down to this – a settlement is a contract and a contract needs to have certainty of terms and certainty of object. If you try to be too clever and achieve an ‘imaginative’ settlement which is, in fact, too uncertain you might well unwind the whole thing.

A mechanic could not fulfil his restoration contract with a classic car owner. They entered a settlement agreement in which the owner agreed to use reasonable endeavours to enter a restoration contract with a third party (in which case no loss would be payable). The owner failed to agree a contract with the third party in the timescale allotted. Was the obligation to use reasonable endeavours a binding obligation?

Well perhaps not. An obligation to use reasonable endeavours to achieve an uncertain object is not binding. For example a contractual term requiring the disputing parties to negotiate and enter a future agreement between themselves is not binding – that is a simple agreement to agree. Phillips Petroleum Co (UK) Ltd v Enron (Europe) Ltd [1997].

And a contract with a third party where the key terms remain to be negotiated with that third party, is also an uncertain object. (How could the court assess whether it was reasonable to enter into a third party contract when details of price etc of that contract had not been agreed in the settlement agreement?). So it is not binding either.

In addition an obligation to use reasonable endeavours to obtain an outcome by a certain date ceases at that date if the object has failed and the contracting party need not continue to use reasonable endeavours.

So, when negotiating settlement agreements:

  • You can use reasonable endeavours clauses where it is clear what must be done.
  • Make sure you provide enough time for completion of the activity.
  • However, be very cautious about reasonable endeavours to
    • enter contracts with the counterparty;
    • enter contracts with a third party; or
    • avoid the loss by engaging with a third party.
  • If you provide reasonable endeavours to do any action which involves a third party be as specific as possible – eg provide for the terms which should be acceptable in a contract with a third party. Even then, take a doubtful look at the enforceability of such a clause.

Ian Tucker comments on emerging commercial issues from a litigation perspective from within Burges Salmon’s Disputes and Litigation team led by David Hall.

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David Hall

David Hall Partner

  • Dispute Resolution
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