Local Government - July 2009

Best or reasonable endeavours?

Many contracts will require one of the parties to achieve or facilitate a particular objective. If there is no qualification on that obligation it amounts to an unconditional undertaking, regardless of what it takes to achieve it. Therefore it is common for these obligations to be qualified by an endeavours clause. This effectively limited the efforts that have to be put in to achieving this objective. However recent cases such as Rhodia International Holdings Ltd v Huntsmann International LLC ([2007]) EWHC 292 have shown that not only are there a spectrum of endeavours clauses, but also that courts in the past have been happy to use them interchangeably. It is hard for the commercial client, when faced with one of these clauses, to know what level of obligation they are effectively binding themselves to. In Rhodia the court did at least indicate that within the spectrum they consider “reasonable endeavours” the least stringent obligation, and “best endeavours” to be the strictest.

Reasonable Endeavours

Reasonable endeavours does not lend itself to being a particularly certain concept. One person’s version of reasonable can be substantially removed from what the other contracting party may believe it to be. One recent formula requires the party under the obligation to weigh that obligation against all the relevant commercial considerations such as third party relations, reputation, and the cost of performing it. Almost all the considerations will be subjective, and there is no requirement that they act in a way which requires them to sacrifice their own commercial interests. Contrary to what has been said in the past, a reasonable endeavours clause does not remove the possibility of having to carry out litigation to perform the obligation, but could limit it to a situation where there is at least a fair chance of success. Those signing a reasonable endeavours clause should not consider it toothless, especially if the obligation it relates to is fairly certain in nature.

Best Endeavours

Best Endeavours represents the upper end of the endeavours clause spectrum and to that end has been considered most widely within the courts. An early formation was 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). More recently this has been refined to include “…all those steps that are in their power which are capable of producing the desired results” which included the steps that a person “acting in his own interests” would take to fulfil the obligation (IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335). Whilst this is an onerous obligation, it is not the next best thing to a guarantee. In most discussions of how best endeavours should be construed there is use of the word “reasonable”. There is an expectation that the obligor may have to conduct himself in a way that can cause him financial expense; best endeavours should not be read in a way which could cause difficulty to the point of bankruptcy. Directors have an interest to act in the interests of their whole company, and this remains the case in relation to best endeavours clauses.

All Reasonable Endeavours

All reasonable endeavours is considered to sit somewhere between reasonable endeavours and best endeavours, being more stringent than the former but less strict than the latter. This was a view endorsed specifically in UBH (Mechanical Services) Ltd v Standard Life Assurance Company, The Times 13 November 1986). Recent case law (Hiscox Syndicates Ltd and Anr v The Pinnacle Limited [2008] EWCH 145 (Ch))  has seemed to indicate that an all reasonable endeavours clause should be read as being closer to best endeavours than anything else. In other words, when faced with an all reasonable endeavours clause, the person performing it should prepare for the possibility of incurring expense and effort before the obligation is satisfied.  

Below is a table including the key characteristics of the 3 main types of endeavours clauses.

Certainty

All the clauses discussed are subject to the rule that they will only be enforceable if they are sufficiently certain. If an obligation to achieve something is not certain, then a clause to take reasonable steps in relation to it will also fail to be enforcable. There is substantial room for movement within the scope of the clauses, depending on the nature of the obligation they attach to. This point was neatly summarised by Millett LJ in Little v Courage Ltd [1995] C.L.C. 164:

“An undertaking to use one’s best endeavours to obtain planning permission or an export licence is sufficiently certain and is capable of being enforced; an undertaking to use one’s 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 enforceable obligation”.

One thing that has become clear from recent case law is the fact that courts will not be bound by commonly held definitions of “best” or “reasonable” where the contract sets out specific steps to be taken in performance of the clause. In the Rhodia case there was reference to “reasonable endeavours” within the contract. However it also specified a set of required steps that had to be performed. This amounted to providing a guarantee personally if it could not secure one independently. Although this requirement was greater than what might normally be expected by a reasonable endeavours clause, in that it would incur financial hardship, it was enforceable because specific steps had been specified in the contract.

Conclusion

Clearly there is scope within all three possible endeavours clauses to argue that they impose more or less onerous obligations on the parties agreeing to them. There is also evidence to say that, if at all possible, the agreement should include specific steps that should be taken in order to prove a party has fulfilled the endeavours clause. It is also worth bearing in mind that in most cases, the court is not concerned with the exact wording of the clause as with whether the party has taken any sort of steps to fulfil the endeavours obligation. If it appears that the obligor will not be able to perform the obligation, then they should make efforts to record what steps were taken in the attempt.

If you would like more advice on endeavours clauses, or any element of contract drafting, please contact Laura Gittins at laura.gittins@weightmans.com