Best or reasonable endeavours?

Best or reasonable endeavours?

A review of the meaning of "best endeavours", "reasonable endeavours" and other common forms of endeavours clauses.
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Endeavours clauses
Many contracts require a party to achieve a particular objective, or procure its achievement. If the obligation is not qualified, then, in the absence of an exonerating circumstance such as a force majeure event, failure to achieve the objective will give rise to liability for breach of contract, regardless of how onerous the objective is, or even whether it is within the partys power to satisfy it. Accordingly, it is common for such obligations to be qualified by an endeavours clause, where a party agrees to use some form of endeavours, or efforts, to achieve the specified objective. It is clear from cases such as Rhodia International Holdings Ltd v Huntsman International LLC [2007] EWHC 292 that there is a spectrum of endeavours clauses, with "best endeavours" being more stringent than "reasonable endeavours". There is some uncertainty as to what efforts each different endeavours clause requires, particularly as in any given case satisfaction of an endeavours clause is also assessed by reference to the other provisions of the agreement, the surrounding commercial context, and the applicable facts at the time performance falls due, no matter how unusual or unexpected they are. However, case law does identify some key characteristics of the more commonly used endeavours clauses that may aid in interpreting and applying such clauses (see box, Characteristics of common endeavours clauses below). Best endeavours The term best endeavours has received the greatest amount of consideration by the courts and the starting point is that the phrase "means what the words say; they do not mean second-best endeavours" (Sheffield District Railway Co v Great Central Railway Co [1911] 27 TLR 451). This has been further refined by the Court of Appeal to require the obligors "to take all those steps in their power which are capable of producing the desired results being steps which a prudent, determined and reasonable [obligee], acting in his own interests and desiring to achieve that result, would take" (IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335). While this is clearly onerous, it is not an absolute obligation, nor is it "the next best thing to an absolute obligation or a guarantee" (Midland Land Reclamation Ltd v Warren Energy, 1997, unreported). 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" (Pips (Leisure Productions) Ltd v Walton [1982] 43 P&CR 415). The following examples show how this principle applies in practice: While best endeavours may require expenditure on behalf of the obligor, they do allow the obligor some regard for its own commercial interests and certainly would not require action resulting in the certain ruin of the Company or ... the utter disregard for the interests of
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shareholders" (Terrell v Mabie Todd and Co. Ltd [1952] 69 RPC 234). Accordingly, the negotiating line sometimes used about best endeavours, "Im not going to bankrupt my business", can be dismissed. 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 (Malik Co. v Central European Trading Agency Ltd [1974] 2 Lloyds Rep. 279). It may be overridden by other duties. In Rackham v Peek Food [1990] BCLC 895, 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 companys interests. Reasonable endeavours 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 obligors 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" (UBH (Mechanical Services) Ltd v Standard Life Assurance Company, The Times, 13 November 1986). These considerations are primarily subjective, that is, based on the circumstances of the obligor, and the obligor is not required to sacrifice its own commercial interests (P&O Property Holdings Limited v Norwich Union Life Insurance Society [1993] EGCS 69; Rhodia). By way of example, this obligation may not extend to taking legal action of a doubtful outcome, but that is not to say it would never require any legal action to be brought, as is sometimes suggested. In addition, in Rhodia, the judge made obiter 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. While this obligation is less stringent than that of best endeavours, it is not toothless. Coupled with a clear objective (see Certainty below) it is capable of constituting an enforceable obligation that may not always be easy to satisfy. All reasonable endeavours The third commonly used endeavours clause, often adopted as a compromise between best and reasonable endeavours, is "all reasonable endeavours". It is the least well-developed clause, with decisions on its meaning being first instance and, in most cases, obiter. The traditional orthodoxy is that all reasonable endeavours sits somewhere between best endeavours and reasonable endeavours. Courts have stated, obiter, that it is "probably a middle position somewhere between the two, implying something more than reasonable endeavours but less than best endeavours" (UBH v Standard Life). This reflects the natural and ordinary reading of the words. However, in Rhodia, the judge stated, obiter, that an obligation to use reasonable endeavours to achieve the aim probably only requires a party to take one reasonable course, not all of them, whereas an obligation to use best endeavours probably requires a party to take all the
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reasonable courses he can. In that context, it may well be that an obligation to use all reasonable endeavours equates with using best endeavours. This passage is sometimes used to argue that all reasonable endeavours equates to best endeavours in all respects. However, it appears that this comment just relates to the number of courses of action a party needs to take and not to the other distinctions between these obligations (such as the extent to which a party might have to comprise its commercial position). In other cases, the term has been used interchangeably with both best endeavours and reasonable endeavours (Agroexport State Enterprise for Foreign Trade v Compagnie Europeene de Cereales [1974] 1 Lloyds Rep. 499; Yewbelle v London Green [2006] EWHC 3166). Finally, in some cases the term has been given an independent meaning rather than one relative to reasonable or best endeavours. In Baring Securities v DG Durham Group [1993] EGCS 192, Barings was obliged to use all reasonable endeavours to secure its landlords consent to an assignment of a lease and to procure one of its subsidiaries to provide security if necessary. This obligation was found to require Barings to "do its best" to secure that consent in light of its other contractual obligations. However, it did not require Barings to get its parent to provide the guarantee in place of the subsidiary. In CEP Holdings Limited v Steni AS [2009] EWHC 2447, CEP was obliged to use all reasonable endeavours to promote and sell Stenis products in the UK under an exclusive distribution agreement. The judge found that this imposed an obligation on CEP to do everything that a reasonably competent and energetic distributor would do to promote the products knowing that [Steni] was entirely dependent on [CEPs] efforts to achieve sales over a period of many years. The judge held that CEP had a reasonable margin of discretion in how it discharged this obligation, but, in reaching the conclusion that CEP had failed to use all reasonable endeavours, found the following factors to be of particular relevance: sales of the products had declined at a time of substantial growth in the rest of the comparable UK market; CEP had failed to produce any structured marketing plans; its internal systems for forecasting and logging sales were inadequate; and it had failed to produce marketing materials and attend trade fairs and seminars to promote the products (see further Legal update, High Court considers meaning of all reasonable endeavours and if distribution agreement validly novated or assigned). Other variations 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. If a modification to one of the more common endeavours clauses is required it may be more fruitful to consider what the parties should actually do in practice, rather than relying on wordplay (see Practical steps below).

Certainty
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Best or reasonable endeavours?

As with any contract term, an endeavours clause will only be enforceable if it is sufficiently certain. It is clear that if a lack of certainty makes an obligation to achieve a particular objective unenforceable, an obligation to endeavour to achieve that result will also fail. This is not to say, as is sometimes suggested, that some endeavours obligations are unenforceable per se. The position was neatly summarised in Little v Courage (1994), where Millett LJ stated:

"An undertaking to use ones best endeavours to obtain planning permission or an export licence is sufciently certain and is capable of being enforced; an undertaking to use ones best endeavours to agree, however, is no different from an undertaking to agree, to try to agree or to negotiate with a view to reaching agreement; all are equally uncertain and incapable of giving rise to an enforceable obligation."
Although this comment relates to agreements to agree, it is important to recognise that this issue can arise in relation to any endeavours obligation which is insufficiently certain. Even if the underlying objective is not so poorly defined as to make the endeavours clause unenforceable, the combination of a less stringent endeavours clause (such as reasonable endeavours) and a poorly defined objective may lead to a very weak obligation. For example, in Philips Petroleum v Enron [1997] CLC 329, an obligation to use reasonable endeavours to agree when the delivery of gas should begin entitled Philips to delay that date on the basis of its own financial position, and the courts declined to apply additional criteria to restrict Philips decision. An obligee should always make sure that the underlying objective is defined clearly and precisely.

Practical steps
From the above, it can be seen that there is a degree of uncertainty as to what an endeavours clause may actually require in any given case. This uncertainty may be addressed to some extent through drafting. One solution to the uncertainty that accompanies such clauses is to define them in the agreement. However, it may be difficult to craft a general definition capable of providing useful guidance in each instance in which the clause is used, especially if the term is used frequently. A more satisfactory approach may be to consider what steps the relevant party should take in the context of achieving that particular obligation and make express provision for it in the contract. For example, the specific requirement to provide a parent company guarantee was determinative in Rhodia v Huntsman. The best approach will vary from case to case, but should have regard to factors such as: Whether the obligor should have to 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. Specific activities that the obligor is or is not expected to carry out.

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Best or reasonable endeavours?

Standards by which endeavours will be judged. For example, a seller could be required to take all reasonable steps that a prudent and determined seller, acting in its own interest and anxious to complete the deal, would have taken. Finally, probably the most decisive factor in applying endeavours clauses is whether the obligor does in fact take steps to comply with the endeavours clause. In the majority of cases the debate is not over the nuances in the differing level of obligation imposed by such clauses, but whether any real endeavours were used at all. The prudent obligor will also record evidence of the steps it took to comply with its endeavours obligation.

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Best or reasonable endeavours?

Boxes
Characteristics of common endeavours clauses
Obligation Perspective Best The obligation should endeavours be generally viewed from the obligees perspective, but may consider the obligors interests. Requires expenditure? May require significant expenditure by the obligor but not ruinously so. Overview 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. Likely to exhibit characteristics of both best and reasonable endeavours.

All Unclear, but may reasonable be slanted towards endeavours considering the obligors position. Reasonable Primarily considered endeavours in light of the obligors circumstances and interests.

May require expenditure but will not require the obligor to pay substantial sums. 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.

NB These terms are particularly fact-sensitive and the characteristics listed above are only an indication of how they may be interpreted in practice.

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Best or reasonable endeavours?

Article Information
RESOURCE INFORMATION

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General

Article ID: 6-380-0482 Document Generated: 03-Nov-2009 16:00:50

Jurisdiction

United Kingdom http://www.practicallaw.com/topic1-103-0717

Subject

Development documents http://www.practicallaw.com/topic8-381-2945 General contract and boilerplate http://www.practicallaw.com/topic9-103-1119 Miscellaneous: finance http://www.practicallaw.com/topic3-103-1103
References

Tenant with Courage loses (http://www.practicallaw.com/6-100-3877) Contract: meaning of reasonable endeavours (http://www.practicallaw.com/6-235-6967) High Court considers meaning of all reasonable endeavours and if distribution agreement validly novated or assigned (http://www.practicallaw.com/6-500-4636) Should you endeavour to be reasonable?: YEWBELLE v LONDON GREEN (http://www.practicallaw.com/9-364-6026)

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