Back to Basics - Best versus reasonable endeavours
Contractual obligations are normally absolute and failure to satisfy an obligation will be a breach of contract. Parties to a contract may, therefore, want to qualify an obligation by only agreeing to "try" to achieve it. Endeavours clauses are commonly used for this purpose. It is clear from case law that there is a spectrum of endeavours clauses, with "best endeavours" being considered more stringent than "reasonable endeavours". Despite the fact they are widely used, there is some uncertainty as to what efforts each type of clause requires.
General rule of construction
The meaning of an endeavours clause must be assessed at the time the contract is formed by reference to its terms, the other provisions of the agreement and the surrounding commercial context. This can create uncertainty over the meaning. However, case law does identify some key characteristics of the more commonly used clauses which may aid in interpreting and applying such clauses.
The term best endeavours has received the greatest amount of consideration by the courts and the starting point is that the phrase requires the obligor "to take all those steps in their power which are capable of producing the desired results … being steps which a prudent, determined and reasonable [person], acting in his own interests and desiring to achieve that result, would take".
Whilst this is clearly onerous, it is not an absolute obligation, nor is it the next best thing to a guarantee. One particularly striking point is the reference to reasonableness, such as the requirement that best endeavours "must at least be the doing of all that reasonable persons reasonably could do in the circumstances. The following examples show how this principle applies in practice:
- A best endeavours obligation may require expenditure on behalf of the obligor. For example, Jet2 successfully obliged Blackpool airport to open outside of its normal operating hours despite the fact the airport incurred a loss in doing so. However, depending on the nature and terms of the contract in question, the obligor may have some regard for its own commercial interests and would not need to take action resulting in the certain ruin of the company or the utter disregard for the interests of shareholders.
- Similarly, an obligation to use best endeavours may well impose an obligation to litigate or appeal against a decision, though this would not extend to action that was doomed to failure or would be unreasonable in all the circumstances.
- It may be overridden by other duties; an obligation on the directors of a company to use best endeavours to pass a resolution did not require the directors to give bad advice to the shareholders and continue to recommend the resolution once it ceased to be in the company's interests.
Reasonable endeavours are a less tangible concept. One formulation involves the obligor balancing "the weight of their contractual obligation" to the other party against "all relevant commercial considerations" such as the obligor's relations with third parties, its reputation, and the cost of that course of action. In doing so, "the chances of achieving the desired result would also be of prime importance". These considerations are likely to be based on the circumstances of the obligor, and the obligor is not required to sacrifice its own commercial interests.
In addition, in one case, the judge made comments suggesting that reasonable endeavours only requires a party to take one reasonable course of action rather than many. It is not entirely clear how this principle would apply in practice, but may constitute another limitation on a reasonable endeavours obligation.
Moreover, once the obligor can do nothing more in terms of reasonable steps to achieve the objective, it is no longer obliged to try.
Whilst this obligation is less stringent than that of best endeavours, it is not toothless. Coupled with a clear objective, it is capable of constituting an enforceable obligation that may not always be easy to satisfy/avoid.
All reasonable endeavours
The third commonly used endeavours clause is "all reasonable endeavours". It is often adopted as a compromise between best and reasonable endeavours. However, it is difficult to decipher its meaning and an analysis of existing case law raises three interlinked questions:
- Does it mean the same as best endeavours?
- Is the obligor obliged to sacrifice its commercial interests?
- Is the assessment based on the obligor's particular circumstances?
There are several variations of the three most commonly used endeavours clauses. For example, the terms "commercially reasonable endeavours" and "reasonable commercial endeavours" are often used to try and soften a reasonable endeavours obligation. However, there is little precedent to support this interpretation, and it is not clear that the courts would differentiate between the terms, given that a reasonable endeavours obligation already involves considering all relevant commercial factors.
Similarly, the term "utmost endeavours" is sometimes seen as an advancement on a best endeavours clause, though again there is little precedent on its use in commercial contracts.
It can be seen that there is a degree of uncertainty as to what an endeavours clause may actually require in any given case, and these uncertainties are best dealt with expressly in the contract.
A useful approach may be to set out the steps the obligor should take to achieving that particular obligation. The approach will vary from case to case, but parties should have regard to factors such as:
- Whether the obligor bear any costs or incur any expenditure and, if so, how much;
- The period for which the obligor should pursue that objective;
- Whether the obligor must take legal action or appeal to achieve the objective;
- Whether the obligor must inform the obligee of its progress in meeting the objective;
- Whether the obligor must step aside if it is unsuccessful and allow, or even assist, the obligee to try to solve the problem itself;
- The extent to which a party is entitled to protect its own interests, is required to act in the interests of the other party, or base its actions on its own particular circumstances. These issues are, in part, determined by the type of endeavours clause used but it may be useful to set them out expressly;
- Specific steps that the obligor is or is not expected to carry out.
Characteristics of common endeavours clauses
|Best endeavours||The obligation should be generally viewed from the obligee's perspective, but may consider the obligor's interests.||May require significant expenditure by the obligor but not ruinously so.||Not an absolute obligation.Includes steps which a prudent, determined and reasonable obligee, acting in his own interests and desiring to achieve that result, would take.
May be subject to countervailing duties on the obligor.
|All reasonable endeavours||Unclear if assessed in light of the obligor's circumstances.||May require expenditure. May or may not require the obligor to sacrifice its commercial interests.||Likely to exhibit characteristics of both best and reasonable endeavours.|
|Reasonable endeavours||Primarily considered in light of the obligor's circumstances and interests.||May require limited expenditure, but does not require the obligor to sacrifice its commercial interests.||Involves balancing the contractual obligation against all relevant commercial considerations.The chance of achieving the result is of prime importance.|
Posted on 08/05/2015 by Ortolan