Melody Hadfield considers the High Court’s decision in Salem v Salem and the enforceability of “reasonable endeavours” clauses.
Salem
In Salem & Anor v Salem & Ors [2024] EWHC 3311, a clause requiring the parties to use “reasonable endeavours” to agree a process for an expert determination was deemed unenforceable.
The clause was contained in a settlement deed, which resolved litigation between the parties concerning their respective interests in a number of UK properties and a large trading business in West Africa (“the African Business”).
The Settlement Deed provided for a two-stage process by which the parties were to attempt to divide the African Business. The first stage was referred to as the “Conciliation Process”; a third party – Mr Ezra Marcos – was to act as conciliator and put forward proposals for the division of the Africa Business between the parties. The Conciliation Process could be brought to an end by either (a) the parties reaching an agreement, or by (b) a written declaration from any of the parties, to Mr Marcos, stating that further efforts at conciliation were no longer justified.
The second stage of the process was contained in clause 6.5 of the Settlement Deed:
“If the Conciliation Process does not result in an agreed division of the African Business … then, unless an extension is agreed by the Parties in writing, by 1 February 2017 the Parties agree to use reasonable endeavours to agree a binding process for an expert determination to value and divide the African Business” (emphasis added).
Ultimately, the Conciliation Process failed. Thereafter, the parties did not seek to agree a process for an expert determination.
One of the parties – Moussy Salem – applied to the court for a declaration that the parties were to comply with clause 6.5 of the Settlement Deed and, in the alternative, a declaration that two of the other parties (Freddy Salem and Beno Salem) were in breach of the Settlement Deed owing to their failure to seek to agree a binding process for expert determination ([36]) (“the Application”).
Freddy and Beno applied for summary dismissal of the Application, alleging, inter alia, that clause 6.5 was unenforceable.
Although noting that CPR 3.4(2) and CPR 24.3 did not strictly apply to the summary dismissal of an application (those provisions deal with the striking out of a statement of case and summary determination of a claim or issue), the court held that the tests set out in those provisions applied by analogy (following the decision of Arnold J in SerVaas Inc v Rafidain Bank [2010] EWHC 3287 (Ch)).
Counsel for Moussy relied on a line of cases which suggest that an agreement to use reasonable endeavours will usually be held to be an enforceable obligation (subject to a number of caveats).
However, the court summarily dismissed the Application. The court held that:
- Clause 6.5 was unenforceable because it was an agreement to agree.
- The provision was not saved by the inclusion of the words “reasonable endeavours”. The court cited from the judgment of Millett LJ in Little v Courage Limited [1995] CLC 164, 169: “An undertaking to use one’s best endeavours to agree…is no different from an undertaking to agree, to try to agree, or to negotiate with a view to reaching an agreement; all are equally uncertain and incapable of giving rise to an enforceable legal obligation.”
Reasonable endeavours clauses
As counsel for Moussy noted, courts are generally inclined to give effect to agreements to use best or reasonable endeavours. This is subject to two caveats: in Jet2.com Ltd v Blackpool Airport Ltd [2012 EWCA Civ 417, [69] Longmore LJ said:
“… an obligation to use best endeavours should usually be held to be an enforceable obligation unless (i) the object intended to be procured by the endeavours is too vague or elusive to be itself a matter of legal obligation; or (ii) the parties have … provided no criteria on the basis of which it is possible to assess whether best endeavours have been, or can be used …”
In Astor Management A.G. v Atalaya Mining Plc and others [2017] EWHC 425 (Comm), Leggatt J suggested that the requirements of certainty of object and sufficient objective criteria are not difficult to satisfy. His Lordship stressed that to “hold that a clause is too uncertain to be enforceable is a last resort” ([64]). Further, Leggatt J considered that “it will 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” ([67]). Astor concerned a clause requiring the defendant to use all reasonable endeavours to obtain a debt facility with a third party.
Whilst courts are inclined to enforce agreements to use reasonable endeavours, it is well-established that an agreement to agree (or an agreement to negotiate) is unenforceable because it is uncertain.
Agreements to agree
In Walford v Miles [1992] 2 AC 128, the defendants decided to sell their company and premises. They received offers from the claimants and from a third party. They agreed, in principle, to sell to the claimants but contract terms were not agreed. The claimants entered into a lock-out agreement with the defendants, pursuant to which the defendants agreed not to negotiate with any other party for the proposed sale. The purpose of the lock-out agreement was to give the claimants an exclusive opportunity to agree contract terms with the defendants. The defendants ultimately withdrew from negotiations with the claimants. The claimants brought proceedings against the defendants for breach of the lock-out agreement. In those proceedings, the claimants alleged that it was an implied term of the lock-out agreement, to give it business efficacy, that so long as the defendants wished to sell the property and company, the defendants would “continue to negotiate in good faith with the [claimants]” (p135).
The House of Lords held that an agreement to negotiate is unenforceable because it lacks certainty. For example, the court has no criteria by which to determine whether any party withdrawing from negotiations is justified in doing so.
Further, the House held that this difficulty could not be resolved by implying into such an agreement a requirement that the parties should negotiate in good faith. Such a term could not be implied because the concept of a duty to negotiate in good faith is “inherently repugnant to the adversarial position of the parties when involved in negotiations” (p138).
In recent times, courts have shown a willingness to distinguish Walford and enforce agreements to negotiate in certain circumstances. In particular, where (a) the term requiring the parties to negotiate on a particular matter is contained in an otherwise binding agreement, (b) the matter on which negotiation is required is limited, and (c) the parties have acted on the basis that the agreement is binding or one party has had the benefit of some performance from the other, courts will be inclined to seek to give meaning to a clause requiring parties to negotiate (Mamidoil-Jetoil Petroleum v Oka Crude Oil Refinery AD (No.1) [2001] EWCA Civ 406, [69]).
However, it seems that a crucial determinant of whether an agreement to negotiate will be enforced by the courts is whether there are objective criteria by which the court can determine whether one proposal or another ought to have been accepted, or whether the parties have themselves provided that criteria within their agreement.
For example, in BBC Worldwide Ltd v Bee Load Ltd (t/a Archangel Ltd) [2007] EWHC 134 (Comm), the defendant had agreed to select music recordings, and the claimant was then to endeavour to obtain all necessary clearances for the sale of the recordings and associated rights. The parties agreed that if these clearances could not be obtained by a specified date, they would engage in a good faith discussion about extending the time frame for obtaining the clearances.
Toulson LJ held that this agreement was unenforceable. Significantly, His Lordship held that: “The clause provides no criteria by which a court could determine whether “in good faith” any particular request for any particular form of extension should be considered favourably” ([95]).
Likewise, in Philip Morris v Swanton Care & Community Limited [2018] EWCA Civ 2763, a clause providing that the parties would extend a 4-year SPA for such further period as “shall be reasonably agreed between [them]”, was held to be unenforceable. Dame Elizabeth Gloster explained that: “the court would have to identify some objective benchmark for determining the reasonable period without reaching an alternative subjective view or descending into the commercial fray; but that is not possible” ([28]).
In summary, although subsequent courts have shown a willingness to distinguish Walford, an agreement to negotiate will not invariably be enforced. Where possible, the preferable course for contracting parties is to reach agreement on all matters at the outset. Further, as the court made clear in Salem, an agreement to agree will not be saved by the insertion of the words “reasonable endeavours”.