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Caught in the crunch – the peril of finance preventing completion



United Kingdom

Caught in the crunch – the peril of finance preventing completion

This article first appeared in Construction News, 18 Oct 12

The turbulent financial climate has thrown up many issues for developers.  Recently the court's attention turned to the question of what happens to a commitment to use reasonable endeavours to complete a development, if despite your best efforts the lack of available finance in a tough market prevents you from doing so and reminded us of the importance of saying what we mean in our contracts.

Terms obliging parties to use "reasonable endeavours" to complete a project are common in construction and development agreements.  When negotiating terms, limiting a commitment to use of reasonable endeavours is generally perceived as 'watering it down', allowing you to strike a balance between your commitments and your own commercial interests.  The more stringent requirement to use "best" or "all reasonable" endeavours do not – you must perform at any cost. 

In the recent Ampurius case, the developer (Telford) agreed to use reasonable endeavours to procure the completion of a mixed use development by specific dates.  Funds from the pre-sale of early phases of the development were supposed to help finance the later phases.  When the credit crunch hit, predicted sales dropped and with no other finance available despite genuine attempts to find it, Telford simply could not finish the development. 

When Ampurius claimed that Telford had breached its commitment to complete, Telford pointed out that it only had to use reasonable endeavours to procure completion.  Telford thought that it had honoured that commitment having tried to find finance even if, ultimately, it could not raise the cash.

Not so said the Courts.  Lack of funding might explain the failure but it did not excuse it.  As far as the Court was concerned 'procuring completion' in the context of a construction project referred to conditions affecting physical performance of the works, not other setbacks that could affect the project.  Telford would not, for example, be responsible for adverse weather or limited supply of materials, but wider issues such as lack of funds were Telford's risk.

You could argue, as Telford did, that finance is so integral to delivery of a project that the availability of finance must be relevant - put simply "no money, no project" and Telford could not influence the financial markets.  However, the dividing line has been drawn. 

Opinions may be divided on whether the Ampurius decision is fair or correct.  Either way, the case reminds us to not just focus on the niceties of the distinction between "best" and "reasonable" endeavours as the temptation is often to do.  Whilst important, even more so is giving thought to the other part of the equation – the scope of what it is that you are committing to use reasonable endeavours to do. 

Had Telford committed to use reasonable endeavours to procure the "finance and completion" of the development for example, the outcome might have been very different.  The message is to be specific, then you should find you get the deal you had bargained for.

Alan Woolston is a partner in the Construction Group at Field Fisher Waterhouse LLP

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