“Shall Endeavour” Clause In Construction/Commercial Contracts Can Create Enforceable Obligations: Bombay High Court

The Bombay High Court has observed that the “shall endeavour” clause can amount to an enforceable obligation in the context of construction contracts. While mere failure to achieve revenue projections does not constitute a breach of the “shall endeavour” clause but not making best efforts to achieve projections in the business plan amounts to a breach of the clause. Facts The present petition was filed by Petitioner i.e. Regus South Mumbai Business Centre Private Limited (“Regus”) under Section 34, Arbitration and Conciliation Act (“ACA”) challenging the Award dated October 18, 2019 passed by the sole arbitrator (“Award”). Regus and the Respondent i.e. Marie Gold Realtors Private Limited (“Marie Gold”) entered into a Management Agreement dated December 20, 2010 under which Regus was to operate a business centre from the concerned premises by sharing 75% net turnover with Marie Gold. Marie Gold was to refurbish the premises. A tentative business plan was prepared with indicative figures on the basis of then market conditions indicating the outflows, inflows and profits estimated to be generated. Disputes arose between the parties with respect to certain multiplication errors in the business plan. Marie Gold issued notice terminating the Management Agreement on January 21, 2014. By consent of the parties, disputes were referred to arbitration. The Sole Arbitrator held Regus to be in breach of the obligations under the terms of Management Agreement in failing to make endeavour to achieve revenue projections in the Business Plan. Marie Gold was held entitled to damages amounting to Rs. 10,10,01,000/- along with interest and cost of Rs. 60,00,000/-. Being aggrieved by the Award to the extent it allows the claims of Marie Gold and rejects the claim of Regus for refund of Rs. 2,25,00,000, Regus filed the present petition challenging the Award. Contentions The Senior Counsel for Regus argued that the Award passed by the Arbitrator was contrary to the express terms of contract agreed between the parties and was perverse. Thus, it was liable to be set aside as being contrary to the public policy and suffering from patent illegality. It was further contended that the Arbitrator erred in relying upon Marie Gold's statement that difference between the amount receivable on revenue projections in the Business Plan and the premium actually received by Marie Gold constitutes loss or damages. The Arbitrator made no inquiry as to how Regus had committed any breach of its obligations under the Management Agreement. No finding was recorded in respect of any specific step which Regus was supposed to undertake under the Management Agreement. Per Contra, the Senior Counsel for Marie Gold submitted that the petition was filed seeking re-appreciation of evidence as if it is an appeal in disguise. Interpreting the terms of contract is the exclusive domain of the arbitrator and a mere error in such interpretation does not provide a ground for setting aside the Award. It was further submitted that the Arbitrator has rightly held that the 'best endeavour' clause in the contract becomes binding on the parties. Additionally, the interpretation given by Regus would render the contract meaningless and no business would enter into a contract which provides for no obligation for the counter party and does not provide for any consequence for breach. ObservationsA bench of Justice Sandeep V Marne observed that the main issue which required the consideration of court was whether the Award allowing the claim in respect of difference in the amount of premium payable as per business plan and premium actually paid to Marie Gold, warranted interreference under Section 34, ACA. The Court analysed the provisions of the Management Agreement and observed that Regus had agreed to 'endeavour to achieve' and exceed the estimated net turnover projected and indicated in the business plan. The Court observed that under Clause 11 of the Management Agreement, Marie Gold had agreed to enter into the Agreement based on the inflows and outflows projected by Regus in the business plan. It was further observed that there was no dispute as to the fact that Regus had not been able to perform as per the projections indicated in the business plan. The Court analysed the reasoning of arbitrator whereby he had held that though mere failure to achieve revenue projections did not constitute a breach but not making best efforts to achieve projections in business plan amounted to breach of the Management Agreement. The Court relied on NBCC India Limited v. Shri Ram Trivedi, wherein the Supreme Court had interpreted the word “shall endeavour” in relation to construction contracts to mean enforceable obligation. The Court held that the word “endeavour” needs to be read in context of the entire agreement between the parties and not in isolation. In the present case,...

“Shall Endeavour” Clause In Construction/Commercial Contracts Can Create Enforceable Obligations: Bombay High Court

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“Shall Endeavour” Clause In Construction/Commercial Contracts Can Create Enforceable Obligations: Bombay High Court

Arpita Pande

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