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Tuesday 3rd July 2012
Beverley Vara discusses the difficulties surrounding a contracting party's obligations and the clarity of those obligations, taking note of the recent Court of Appeal case Jet2.com Limited v Blackpool Airport Limited.
07 June 2012
The issue
Where a contracting party's obligations are unclear, or where insufficiently precise descriptions of relevant ancillary matters are given (for example, appropriate qualitative and quantitative criteria pertaining to those obligations), this can generate fertile ground for dispute.
Where phrases such as "best endeavours", "reasonable endeavours" and "all reasonable endeavours" are used to define a party's obligations, this is particularly the case.
Any obligation that encompasses an "endeavours" element is inherently qualified and is therefore not absolute. But deciding where to draw the line between what is required and what is not is difficult.
The recent Court of Appeal case Jet2.com Limited v Blackpool Airport Limited highlights these difficulties and looks at, among other things, the question of to what extent a party owing a "best endeavours" duty can take into account its own commercial position when considering to what extent it must comply with that duty.
Background
The agreement stated: "[Jet] and BAL will co-operate... and use their best endeavours to promote [Jet's] low-cost services and BAL will use all reasonable endeavours to provide a cost base that will facilitate [Jet's] low cost pricing" (Clause 1). The agreement was silent as to operating hours.
For four years, Jet operated services outside of normal operating hours. Following a deterioration in relations, in 2010 BAL notified Jet that it could no longer operate outside of normal hours. Jet issued proceedings seeking damages for breach of contract and a declaration. At first instance the judge ruled in favour of Jet. BAL appealed.
Argument
BAL first argued that Clause 1 was akin to a contractual preamble and that the parties had not intended it to be legally binding. Furthermore, the objects of the "reasonable endeavours" were so uncertain as to be incapable of giving rise to a legally binding obligation.
In the event that Clause 1 was held to be legally binding, BAL argued that it did no more than impose a duty on BAL to use its "best" or "all reasonable endeavours" (which the parties accepted had the same meaning in this context). This extended no further than "promoting" Jet's services in the narrow sense, in other words to carrying out promotional and marketing activities.
It did not require BAL to act contrary to its own commercial interests by keeping the airport open beyond normal hours, the cost of which was not recouped in extra revenue. In any event, the agreement did not operating hours.
Initial Hearing
Jet argued that Clause 1 did oblige BAL to allow it to operate flights outside of normal opening hours. It supported this argument by reference to the nature of the low-cost airline industry and its contention that the parties understood that in order for Jet's business model to be viable, it would have to operate outside BA's normal opening hours.
Even though the agreement was silent on the matter of operating hours, the parties must therefore be taken to have understood that this was necessary. In addition, Jet argued that the word "promote" should be given a broader interpretation and that it meant "advance" rather than "advertise" or "market". This therefore obliged BAL to take any steps that might help Jet's business.
In the alternative, Jet argued that BAL should be prevented from curtailing the operating hours by means of an estoppel arising out of the previous four years' practice.
Decision
The Court of Appeal ruled in favour of Jet by a majority of two to one. An obligation to use "best endeavours" will be legally enforceable provided that the object is defined with sufficient certainty. In this case, the Clause 1 obligations were not uncertain and therefore bound BAL, although the court conceded that delineating their scope was a "more difficult question".
The obligation to use best endeavours in this case meant that BAL had to do "all that it reasonably could do to enable [Jet's] business to succeed and grow" and this extended to opening the airport early and late.
With regards to BAL's right to protect its own financial interests, the court held that BAL could not restrict the opening hours even if in so doing it incurred a loss. However, the duty was not infinite: if Jet were bound to lose money, BAL would not be expected to "promote" a failing business.
Impact
- The Court of Appeal's decision was not unanimous and Lord Justice Lewison gave a strong dissenting judgment. The lack of consensus at this level evidences the degree of debate over these issues.
- Parties negotiating any agreement by which they intend to be bound are advised to take legal advice to ensure that the various rights and obligations are described with sufficient precision.
- The extent to which a party can have regard to its own financial interests when complying with an "endeavours" obligation will depend on the facts of the case.
Beverley Vara is a partner and head of real estate litigation at solicitors Allen & Overy LLP