Altis PropCo2 Pty Ltd v Majors Bay Development Pty Ltd [2022] NSWSC 403
What happened?
The Contract
On 27 February 2020, Altis PropCo 2 Pty Ltd (Altis 2) entered into a contract of sale (the Contract) for the purchase of 59 apartments from Majors Bay Development Pty Ltd (MBD).
The Contract was made subject to Altis 2 obtaining approval for a loan that had been conditionally approved by Westpac (29 January Term Sheet)1. Significantly, Altis 2 agreed to use its ‘best endeavours’ to have the loan approved. Either party was entitled to rescind the Contract if the loan was not approved2, in which case Altis 2 would have its deposit returned3.
Loan Negotiations
On 23 March 2020, Westpac issued to Altis 2’s parent company, Altis Property Partners Pty Ltd (Altis) a new proposed term sheet (23 March Term Sheet) that contained more onerous terms than those found in the 29 January Term Sheet4. Altis did not immediately respond.
Later that month, after Westpac had asked Altis whether the rental returns would be sufficient to service the loan under the revised terms5, Altis informed Westpac that it held concerns due to the COVID-19 restrictions in place at the time and the consequent challenge to secure tenants. Altis requested a return to the original pricing under the 29 January Term Sheet6.
As a result, on 1 April 2020, Westpac withdrew its 23 March Term Sheet7.
Over the coming months, Altis made enquiries with both KKR and Westpac to determine whether either party was willing to negotiate the terms of the loan, however, both parties were unwilling.
On 12 June 2020, in accordance with the terms of the Contract, Altis 2 rescinded the Contract due to its inability to secure the loan8.
Litigation
Later, Altis 2 commenced proceedings against MBD arguing that it had lawfully rescinded the Contract and was therefore entitled to have the deposit returned.
In response, MBD contended that Altis 2 had not lawfully rescinded the Contract as it had failed to use its ‘best endeavours’ to have the loan approved by Westpac.
The Court ultimately found in favour of Altis 2.
Decision of the Victorian Supreme Court
The presiding judge, Ball J, agreed with the interpretation of ‘best endeavours’ adopted in Hospital Products Ltd v United States Surgical Corporation and Others9 where Gibbs CJ held that it required the obligor to ‘do all that reasonably can be done in the circumstances to achieve the contractual obligation, but no more’10.
In light of this definition, his Honour cited three key points in support of his conclusion that Altis 2 had satisfied its ‘best endeavours’ obligation.
First, Ball J ruled that ‘the best endeavours obligation did not require Altis to seek quite different (and less favourable) terms from Westpac. It was limited to an obligation to obtain a loan on substantially the same terms’11 as the 29 January Term Sheet.
Second, the Court accepted that Altis 2, when attempting to negotiate the loan with Westpac in April and May 2020, was ‘going through the motions to preserve its right of rescission.’ Despite such an unfavourable assessment, Ball J held that Altis 2 had no other option considering that KKR was unwilling to accept more onerous terms12.
Third, Altis 2’s forthright response to Westpac’s questions regarding its ability to service the loan was not contrary to the ‘best endeavours’ obligation it owed to MBD. Altis 2 was required to answer the questions honestly and to do otherwise would have unlawfully misled Westpac13.
Key Takeaways
Parties entering into contracts with ‘best endeavours’ clauses should be cognisant that the obligation only requires the obligor to do all that reasonably can be done in the circumstances to comply with the specific obligation, and the obligor is not expected to demonstrate any great flexibility beyond what is reasonable. Further, if compliance looks improbable if not impossible, the obligor is able to satisfy its ‘best endeavours’ obligation by simply ‘going through the motions’ of attempting to comply.
These features may limit the utility of a ‘best endeavours’ clause for parties who want a counterparty to demonstrate a high degree of flexibility and effort when attempting to satisfy an obligation.
This article was written by Alan Chiang, Partner, and Timothy White, Solicitor.
1Altis PropCo2 Pty Ltd v Majors Bay Development Pty Ltd [2022] NSWSC 403 (‘Judgment’) [26].
2Judgment [26].
3Judgment [28].
4Judgment [30], [35].
5Judgment [39].
6Judgment [42].
7Judgment [43].
8Judgment [62].
9(1984) 156 CLR 41 (‘Hospital Products’).
10Hospital Products [24]. See Judgment [72].
11Judgment [102].
12Judgment [102].
13Judgment [89].
