Let’s Talk …. Reasonable & Best Endeavours

Whats the difference between reasonable & best endeavours?

I often get asked what is the difference between reasonable and best endeavours? Which one is better for me and which one should I avoid? The below article will hopefully give you a good overview and understanding.

Contracting parties usually have a polarised approach to ‘endeavours’ terms, with one party seeking to impose the most onerous form of the obligation on the other party, and the other party trying to resist it. The final position is usually reached following considerable negotiation and often represents a compromise where one party has argued that it is not reasonable for it to be placed under an absolute obligation.

Absolute obligations compared to ‘endeavours’ obligations

The most onerous obligation which can be imposed in an agreement is an absolute obligation to do something. An example would be ‘the Seller will deliver the goods’, which will be breached if the obligation is not performed regardless of the reason (subject to other terms which may excuse performance, such as force majeure). Similarly, an obligation to ‘procure’ that something is done creates an absolute obligation on a party to make sure that it happens.

However, an absolute obligation may not be appropriate where the party’s performance is:

• dependent on matters outside of its control
• subject to changing circumstances which may impact on performance

for a remuneration which does not reflect the potential additional costs of guaranteed performance.

In such circumstances, one party (the obligee) may instead place the other party (the obligor) under an ‘endeavours’ obligation. The variants of an ‘endeavours’ obligation represent a full spectrum of obligations. The most onerous of these is best endeavours followed by all reasonable endeavours. At the other end of the spectrum is the obligation to use reasonable endeavours, which provides the weakest form of endeavours obligation.

It is important to note that the exact meaning of these expressions will always be subject to the standard rules of contractual interpretation, and therefore will not mean the same thing in any given context.

Given that determining the meaning of an endeavours clause is an inherently fact specific exercise, disputes over such clauses are not generally suitable for determination on a summary disposal basis, thus increasing the likely cost of litigating such dispute.

Quick OverView:

This table sets out key points for each endeavours variant. For further commentary on these obligations and exploration of related cases, see the specific sections after this table: 'Best endeavours', 'All reasonable endeavours' or 'Reasonable endeavours' respectively below.

Best Endeavours

What does the obligation require??

A best endeavours obligation requires the obligor to use no less than its best efforts to achieve the specific result. In other words, the obligor must ‘leave no stone unturned’ to achieve the desired result, within the ‘limits of reason’.

As an example: In Sheffield District Railway v Great Central Railway, the Sheffield District Railway (SDR) had entered into an arrangement with the Lancashire, Derbyshire and East Coast Railway (LDECR), which included an obligation on the LDECR to use best endeavours to develop the SDR’s railway traffic. The LDECR subsequently amalgamated with the Great Central Railway (GCR), which took over the operation of the SDR on the terms of the arrangement.

However, the GCR continued to act as it had before, taking goods that could have been taken to or from one of the SDR’s stations to or from one of the GCR’s stations instead. The SDR alleged that the GCR was in breach of its obligation to use its best endeavours to develop the SDR’s railway traffic. Lawrence J held that:

• ’“best endeavours” means what the words say; they do not mean second-best endeavours. We quite agree…that they cannot be construed to mean that [the GCR] must give half or any specific proportion of its trade to [the SDR]. They do not mean that [the GCR] must so conduct its business as to offend its traders and drive them to competing routes. They do not mean that the limits of reason must be overstepped with regard to the cost of the service: but short of these qualifications the words mean that [the GCR] must, broadly speaking, leave no stone unturned to develop traffic on [the SDR’s] line.’ (at 452)

How far must the obligor go to satisfy the obligation?

Having recognised in Sheffield District Railway v Great Central Railway that there are limits to what an obligor is required to do to satisfy its obligation, the courts have subsequently explored what that limit is and where the line is drawn. The extent of a best endeavours obligation is still qualified by reasonableness.

Determining whether best endeavours have been used in any particular case is highly fact sensitive and a conclusion reached on one set of facts may be different to another set of facts, even if the facts only differ in minor respects.

What is reasonable?

The courts consider that the standard of reasonableness is that of a reasonable and prudent Board of Directors acting properly in the interests of their company and applying their minds to their contractual obligations. There is no requirement that a company subject to a best endeavours obligation must act in a way that would cause financial ruin or be in complete disregard of the interests of the company’s shareholders. Instead, it requires that the directors of the company do what can reasonably be done in the circumstances.

This general approach was further explored in IBM UK Ltd v Rockware Glass Ltd where the obligor was required to take all those steps in its power which could produce the desired results, being steps which a prudent, determined and reasonable obligee, acting in its own interest and desiring to achieve that result, would take.

In IBM v Rockware, IBM entered into an agreement with Rockware for the purchase of land, whereby IBM was required to make an application for, and use its best endeavours to obtain, planning permission. The planning permission was refused by the Local Planning Authority and the question arose as to whether IBM was required to incur further cost by appealing the decision to the Secretary of State under its best endeavours obligation. Rockware argued that IBM was under an obligation to exhaust all legal remedies to obtain planning permission.

Buckley LJ in the Court of Appeal considered that, in the absence of any context indicating the contrary, IBM’s obligation to use its best endeavours to obtain planning permission should be understood to mean that IBM were required to do all they reasonably could to ensure that planning permission was granted, which in this case included appealing a decision of the Local Planning Authority provided there was a reasonable chance of success. He went on to state that an obligor is:

• ‘bound 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 interest and desiring to achieve that result would take.’

However, the obligor is not required to take steps which are commercially unreasonable, such as conduct tainted by fraud or breach of other agreements (Monkland v Jack Barclay).

In Monkland v Jack Barclay, the Court of Appeal held that conduct tainted by fraud was not required of Jack Barclay (a motor trader) to fulfil its best endeavours obligation to obtain delivery of a car for Monkland (a customer), nor was Jack Barclay required to breach its retailer agreement, its agreement with another customer, or its agreement with the British Motor Trade Association, which could have put it on the stop list ‘killing them stone dead in a commercial sense’.

As the manufacturers refused to supply Jack Barclay with a car for Monkland unless he signed the covenant, and he continuously refused to sign despite Jack Barclay’s efforts to persuade him, Jack Barclay had used its best endeavours to secure delivery.

Can the obligor consider its own commercial interests?

Whether, and to what extent, a person who has undertaken to use their best endeavours can have regard to their own financial interests depends on the nature and terms of the contract in question.

However, a best endeavours obligation presupposes that the obligor may incur financial cost, and therefore financial cost cannot be a ‘trump card’ to enable the obligor to get out of its obligation.

Does the obligor have to pursue litigation or appeal a decision to fulfil its obligation?

A best endeavours obligation extends to pursuing litigation or an appeal against a decision, unless the obligor can demonstrate that such an appeal or litigation was ‘doomed to fail’ or unreasonable in the circumstances.

All reasonable endeavours?

What does the obligation require?

An ‘all reasonable endeavours’ obligation is the most uncertain of the three endeavours variants referred to in this Article, with conflicting case law on its exact meaning and scope.

In UBH v Standard Life, Rougier J considered (obiter) that an all reasonable endeavours obligation was likely to fall between best endeavours and reasonable endeavours, requiring less than best endeavours but more than reasonable endeavours.

Conversely, in Rhodia v Huntsman, Flaux J sitting in the High Court considered (obiter) that an all reasonable endeavours obligation may well equate with an obligation to use best endeavours on the basis that an obligation to use reasonable endeavours requires a party to take only one reasonable course of action, whereas an obligation to use best endeavours probably requires a party to take all the reasonable courses of action it can. This judgment has been relied on subsequently by the courts to equate ‘all reasonable endeavours’ with ‘best endeavours’ (Barclay v Tuck).

Although case law can provide some degree of guidance, the meaning of the words ‘all reasonable endeavours’ in any particular case will not always mean the same thing and will depend primarily on the construction of the contract.

How far must the obligor go to satisfy the obligation?

As the meaning of an ‘all reasonable endeavours’ obligation is uncertain, so is the exact scope of the obligation. This was explored in Yewbelle v London Green Development?

When considering how far an obligor must go to fulfil an ‘all reasonable endeavours’ obligation, much of the discussion in case law has centred around whether the obligor is required to sacrifice its own commercial interests.

Can the obligor consider its own commercial interests?

The Courts have provided guidance to a certain extent and have stated that a party is not required to sacrifice its own commercial interests in using all reasonable endeavours. However, it is important to note that this was considered in the context of whether an all reasonable endeavours obligation extended to entering into a contract with a third party, where to do so would have required significant expenditure on the part of that party.

This has been confirmed in other cases in that there is no requirement to sacrifice one’s own commercial interests where the contract imposes an obligation to use all reasonable endeavours in relation to third parties (eg it is not necessary to pay an extortionate price to obtain what is required from a third party). The requirement to act against a party’s commercial interests relates only to matters within that party’s control.

Does the obligor have to pursue litigation or appeal a decision to fulfil its obligation?

An all reasonable endeavours obligation does extend to pursuing litigation or an appeal against a decision, although as with any other ‘endeavours’ obligation, the scope of such an obligation can be limited by setting out the circumstances under which a particular course of action has to be taken to satisfy the obligation.

All reasonable endeavours compared with duty of good faith

Case law suggests that a duty of good faith is a lesser duty than the positive duty to use all reasonable endeavours, and therefore a duty to act in good faith does not need to be implied into a contract where the party is already under a relevant ‘all reasonable endeavours’ obligation.

Reasonable Endeavours

What does the obligation require?

A ‘reasonable endeavours’ obligation is less stringent than a ‘best endeavours’ obligation. This is because an obligation to use reasonable endeavours to achieve the objective only requires the obligor to take one reasonable course of action, whereas an obligation to use best endeavours probably requires the obligor to take all the reasonable courses it can.

How far must the obligor go to satisfy the obligation?

The obligor has satisfied its reasonable endeavours obligation to achieve the specified outcome when it has done what a reasonable and prudent person acting properly in their own commercial interest and applying their minds to their contractual obligation would have done to try to achieve the objective.

However, the obligor is not required to take steps to achieve the objective if those steps would have been useless or insufficient to achieve success, provided the obligor can show this is the case.

An obligation to use reasonable endeavours ceases to apply when the obligor correctly takes the view that no further reasonable steps are available to achieve the objective.

Force majeure provisions

Often a force majeure clause will make specific reference to a party using reasonable endeavours to overcome or mitigate the effects of a force majeure event. As a force majeure event will typically be defined as an event which is beyond the control of the parties, different factors have been at play when the courts have considered the meaning of ‘reasonable endeavours’ in this context.

What is clear is that when considering reasonable endeavours in the context of force majeure, what amounts to reasonable endeavours will be heavily dependent on the construction of the force majeure clause, the impact of any reasonable endeavours and the factual context of each individual case.

Can the obligor consider its own commercial interests?

A reasonable endeavours obligation does not require the obligor to sacrifice its own commercial interests, except where the contract specifies certain steps must be taken as part of the exercise of reasonable endeavours. In such circumstances, those steps must be taken by the obligor, even if that involves sacrificing its own commercial interests.

What else can the obligor take into consideration?

The balancing test

The obligor is entitled to carry out a balancing act between its contractual obligation to the obligee, and all relevant commercial considerations of the obligor, including:

• its relationship with third parties
• its reputation in the relevant market
• the cost and uncertainties of proposed litigation with third parties that might result from seeking the desired outcome
• the expense of the obligation
• the chances of achieving the desired result of any proposed course of action

Affordability

Affordability is a factor to be considered when evaluating reasonableness. The Courts formed the view that a reasonable endeavours obligation to enter into an agreement with a third party by a specified date did not extend to the obligor being required to commit itself to borrowing substantial additional sums from the bank or asking for a loan. Once the obligor became aware of the substantial financial loss it would have incurred by entering into the agreement, it was entitled to cease using its reasonable endeavours.

A lack of funding is unlikely to excuse failure to perform an obligation that is qualified by reasonable endeavours. However, whether and to what extent this is taken into account by the courts in determining whether a ‘reasonable endeavours’ obligation has been satisfied will depend on the precise wording of the endeavours obligation as well as the steps taken by the obligor to obtain the necessary funding.

Does the obligor have to pursue litigation or appeal a decision to fulfil its obligation?

Although a reasonable endeavours obligation may include the pursuit of litigation or the appeal of a decision, it does not require the obligor to take legal action with a doubtful outcome.?

Qualifying wording and conditions?

The addition of qualifying wording or conditions can impact the scope of an ‘endeavours’ obligation. Although the below points were considered in the context of a specific ‘endeavours’ obligation, they are applicable across the ‘endeavours’ spectrum.

Obligor’s other duties

An ‘endeavours’ obligation may be overridden by the obligor’s other duties. For example, a best endeavours obligation to obtain shareholder approval does not require directors to give bad advice to shareholders or continue to recommend a course of action if it is no longer in the company’s interests.

Not an absolute obligation

An ‘endeavours’ obligation does not impose an absolute obligation nor is it a guarantee.

Scope of obligation considered at time of performance or breach

Exactly what amounts to ‘endeavours’ must be considered at the time of performance or breach of the obligation, not at the time of the creation of the contract.

Specifying steps

Where an ‘endeavours’ obligation specifies steps which must be taken, the obligor must take those steps to satisfy the obligation.

Commercially prudent endeavours

Using the words ‘commercially prudent’ in an ‘all reasonable but commercially prudent endeavours’ obligation may reduce the scope of the obligor’s obligation. The court held in CPC v Qatari that it:

• is not equivalent to a best endeavours obligation
• allows the obligor to consider its own financial interests alongside those of the obligee
• requires the obligor to take all reasonable steps to meet the objective provided they are commercially prudent

While this case can somewhat be distinguished by the inclusion of the ‘commercially prudent’ language, it demonstrates the importance of the factual and contractual context when interpreting an endeavours clause and the potential uncertainty of an ‘all reasonable endeavours’ obligation.

Circumstances which trigger a course of action

The scope of an ‘endeavours’ obligation can be limited by setting out the circumstances under which a particular course of action has to be taken to meet the objective of the obligation.

Specifying dates for the obligation

If an ‘endeavours’ obligation requires the obligor to do something by a particular date, this does not usually mean that the obligation expires on that date or that failure to achieve the objective by that date is a reason for releasing the obligor from further performance.

Other time requirements

Specifying that an obligor must use ‘endeavours’ to achieve an objective ‘as soon as reasonably practicable’ can add a time requirement to the obligation, meaning the obligor has to fulfil the obligation ‘as soon as reasonably practicable’ rather than ‘when convenient’ or ‘at the time best suited to the obligor’. In determining whether an obligor used their reasonable endeavours to do something by a particular time, the relevant question is whether there was an ‘objective justification’ for the time taken to satisfy the relevant conditions.

The obligor’s own actions

Where an obligor undertakes to use ‘endeavours’ to achieve a particular aim, it is implicit that the obligor undertakes not to make that aim more difficult to achieve by its own actions.

Drafting endeavours clauses and Enforceability

For an endeavours clause to be enforceable, it must meet the following criteria:

• the object of the obligation must be sufficiently certain
• there must be sufficient objective criteria against which the obligation can be judged

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