‘Best’, ‘reasonable’ and ‘all reasonable endeavours’ - what level of effort will do?

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English law is frequently chosen as the governing law of the contract in international transactions, even though neither party to the agreement is English, and indeed many Norwegian companies that trade with English or other European undertakings often agree to allow English law to be the governing law of the agreement - perhaps without a comprehensive overview of the obligations attached to the various contractual clauses. In this article we attempt to clarify the level of effort required under a specific type of clause in English contract law – the ‘endeavours clause’.
Thursday, September 29, 2016

Authors: partner Guy Leonard and associate Heidi Magnussen

Contractual obligations are normally absolute and failure to satisfy an obligation will be a breach of contract. In some cases, performance of the obligation requires external factors, making it outside of the control of the obliged party. A way to address this disconnect, is to qualify an obligation by only agreeing to “try” to achieve it. Endeavours clauses are commonly used for this purpose, and the level of effort attached to an endeavours clause is a frequent negotiating point in commercial contracts. It is clear from case law that there is a spectrum of endeavours clauses, with “best endeavours” being more stringent than “reasonable endeavours”. Despite the fact they are widely used in practice, there is some uncertainty as to what level of effort each different endeavours clause actually requires.

1. General rules of construction and certainty

The first point to remember is that the meaning of an endeavours clause will be assessed by reference to the time when the contract was formed. This includes an assessment of the other contractual terms and the surrounding commercial context. The consequence is that a particular endeavours clause will not always mean the same thing, and will vary with the specific circumstances of the contract.

It is however important to note that while an undertaking to use endeavours is interpreted at the time of the contract, the satisfaction of that undertaking will be assessed by reference to the circumstances which existed at the time of performance – no matter how unusual or unexpected they may be.

The second point to bear in mind when assessing an endeavours clause is the notion of certainty. Certainty will determine whether the endeavours clause is enforceable at all. If the underlying objective is unenforceable due to a lack of certainty, an obligation to endeavour to achieve that result will also fail. For example, in Jet2.com v Blackpool Airport Ltd [2011] the airport was under an obligation to use all reasonable endeavours to “provide a cost base that will facilitate Jet2.com’s low cost pricing”. When the case ended up in court Jet2.com argued that the obligation required the airport to help Jet2.com to keep its prices down, however the Court of Appeal held that the words were too uncertain to enable the court to give them that meaning.

An obligee should therefore always make sure that the underlying objective is defined clearly and precisely in the contract.

Below is an explanation of some of the most common features relating to the three most commonly used endeavours clauses, namely ‘best endeavours’, ‘reasonable endeavours’ and ‘all reasonable endeavours’.

2. Best endeavours

The starting point here is that the phrase means what the words say; they do not mean second-best endeavours. 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”.

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. 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 a reasonable person could reasonably do in the circumstances.

A best endeavours clause may require the obligor to incur some expenditure in the fulfilment of the obligation in question. At the same time the obligor will be permitted to have some regard for his own commercial interests in determining what course of action to take. This means that in certain circumstances he may be able to override a best endeavours obligation, e.g. an obligation on the directors of a company to use their best endeavours to pass a resolution does not require them to recommend the resolution to their shareholders if it is clear that the resolution is not in the company’s best interests.

In practice, a best endeavours obligation will usually require a company to:

  • take all commercially practicable actions,
  • incur reasonable expenses in the performance of that obligation, and
  • if necessary, divert resources from elsewhere within the company in order to fulfil the obligation.

 3. 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 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” (UBH (Mechanical Services) Ltd v Standard Life Assurance Company). 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 (P&O Property Holdings Limited v Norwich Union Life Insurance Society [1993]). By way of example, this obligation may not extend to taking legal action where a positive outcome is doubtful, but that is not to say it would never require any legal action to be brought, as is sometimes suggested.

In addition, in Rhodia International Holdings Limited v Huntsman International LLC [2007], the judge made obiter (non-binding) comments suggesting that reasonable endeavours only require 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 (Dany Lions v Bristol Cars [2014]).

While 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.

 4. All reasonable endeavours

The third commonly used endeavours clause is “all reasonable endeavours”. It is commonly adopted as a compromise between best and reasonable endeavours. Courts have stated, obiter, that it is probably a middle position sitting somewhere between best and reasonable endeavours, implying something more than reasonable endeavours but less than best endeavours. This reflects the natural and ordinary reading of the Words.

By contrast, 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 reasonable courses he can. In that context, it may well be that an obligation to use all reasonable endeavours equates with using best endeavours”.

5. Summary

The table below gives an overview of the level of effort required in relation to each of the different endeavours clauses. These terms are particularly fact- and context-sensitive and the characteristics listed below are therefore only an indication of how they may be interpreted in practice.

Obligation

Perspective

Requires expenditure

Overview

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 oblige, 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.

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