Best, reasonable and all reasonable endeavours: what are you agreeing to do?

Three recent overseas decisions have shed some light on the meaning of the terms "best endeavours", "reasonable endeavours" and "all reasonable endeavours". Each of these terms is used regularly to qualify parties' obligations in commercial agreements, but without necessarily any clear understanding by the party of the extent to which he or she has committed to achieving the desired result. In this article we review the recent cases and offer some practical guidance for negotiating levels of "endeavours" obligations.

The question of whether to use "best endeavours", "reasonable endeavours" or "all reasonable endeavours" (and in more recent times, "reasonable commercial endeavours") can be a difficult one for contracting parties. It is generally accepted that "best endeavours" is a higher obligation than "reasonable endeavours", but what do they actually require you to do?

The courts have yet to resolve this question, but recent judicial consideration of these terms in England and Australia goes some way to clarifying the scope and the extent of what the different endeavour obligations entail.

AN OVERVIEW OF THE ENDEAVOUR OBLIGATIONS

Reasonable endeavours

Reasonable endeavours is traditionally thought of as requiring a party to take one reasonable action in a given situation, to achieve a particular aim, but not to exhaust all of them. In the words of one judge "put simply" it is a requirement to have "an honest try". Cases have indicated that a reasonable endeavours obligation allows a party to justify not taking a particular action if that action disadvantages the party under the obligation. It allows the party to balance the weight of the obligation against all relevant commercial considerations including the costs of, and the uncertainties and practicalities relating to, compliance with the obligation.

Best endeavours

The standard set for a best endeavours obligation is more onerous "but well short of an absolute obligation or guarantee". Generally the courts have interpreted this obligation to require the party to do all they can reasonably do in the circumstances to achieve the contractual objective. This, however does not require the party "to go beyond the bounds of reason" and certainly "not to the point of ruin". A best endeavours obligation is still based on the concept of reasonableness. For instance, cases have indicated that a best endeavours obligation can require a party to expend costs and take the risk of success or failure, but only where there is reasonable chance of success and subject to other financial considerations. One of the more helpful accounts of what best endeavours entails is from a 1980 English court of appeal case in which the court explained the requirement as an obligation to take "steps which a prudent, determined and reasonable [person], acting in his own interests and desiring to achieve that result, would take."¹

All reasonable endeavours

There is ongoing debate around the obligations required by the phrase "all reasonable endeavours". In earlier cases "all reasonable endeavours" has been treated as falling somewhere between the previous two forms of endeavours, "implying something more than reasonable endeavours, but less than best endeavours".² As a result it is commonly used by negotiating parties as the compromise position. Recent English and Australian authorities (noted below) however suggest that there may be no relevant difference between an obligation to use best endeavours and an obligation to use all reasonable endeavours since they both require a party to do all they reasonably can in the circumstances to achieve the contractual objective.

THE CASES

Yewbelle v London Green Developments

The scope of what "all reasonable endeavours" might entail was recently considered by the English courts in Yewbelle v London Green Developments³. The vendor in a property sale agreement had agreed to use "all reasonable endeavours" to enter into a planning agreement with a local planning authority that would allow for the redevelopment of the site (in the agreed form) as a condition of the sale proceeding.

However, soon after the agreement for sale had been entered into the authority's requirements in respect of the proposed planning agreement changed, affecting the transaction adversely. Moreover, it turned out that a small parcel of land at one corner of the site, which the parties had assumed was owned by the authority, turned out to belong to an entirely independent company. Faced with these difficulties the vendor decided to end its negotiations with the local authority and terminate the sale and purchase agreement. One of the questions raised was whether the vendor was entitled to terminate the sale and purchase agreement if it had failed to use "all reasonable endeavours" to fulfil the contractual objective.

On the evidence, the judge in the first instance concluded that the vendor had not fulfilled this obligation. The judge agreed that while an obligation to use all reasonable endeavours did not require the vendor to sacrifice its own commercial interests, the obligation did require the vendor:

"to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted... subject to the qualification that account must be taken of events as they unfold, including extraordinary events."

In the court's opinion, the vendor's negotiations with the local authority had not been taken to a point where there was no chance of the authority reaching an agreement with the vendor in substantially the same form as required by the sale and purchase agreement.

The appeal court agreed with the judge that the negotiations with the authority may have been able to be taken further on the points addressed, but held that the judge had reached the wrong conclusion by not taking into account the overriding problem of the effect the discovery of the third party land had on the transaction. On this aspect the court noted that the requirement to use all reasonable endeavours did not include the vendor laying out significant funds such as would have been required to attempt to buy in the land itself (or pay out to the third party for becoming a party to the planning agreement). It also could not require the vendor to adapt the proposed development so as to fit on the site without the third party land as this would be inconsistent with the contract.

Accordingly, since it was the vendor's obligation to do whatever was needed to be done by way of reasonable endeavours to achieve the result, without any reference to the purchaser, there was nothing further, in the court's view, that the vendor should have done that it had not done.

Rhodia International v Huntsman

In another recent English case, Rhodia International v Huntsman⁴, Rhodia had agreed to sell its European chemical business to a recently incorporated subsidiary of Huntsman. As is common in sales of businesses, the sale and purchase agreement recognised that an absolute obligation could not be imposed on the assignment of the contracts of the business that required the consent of third parties. Instead, the parties agreed to use their respective "reasonable endeavours" to obtain third party consent to the assignment or novation of such contracts to the purchaser. It was also a term of the sale agreement that Huntsman was to provide a direct covenant to any third party (where reasonably required) guaranteeing the performance of the contract if that was required by the third party as a condition of the consent being granted.

One of the key contracts to be transferred was an energy supply contract that Rhodia was a party to with a third party, Cogen. Pending consent to the novation of this contract, Huntsman's subsidiary took over operation of the supply contract and the associated power plant at the business' site as Rhodia's agent. As part of the novation process, Cogen raised concerns over the financial position of Huntsman's subsidiary and sought a parent guarantee from Huntsman. Huntsman refused to give the guarantee and the novation did not take place. Later Huntsman made the decision to close the power plant and gave notice to Rhodia that the supply contract was to be excluded from the sale and purchase of the business. However, by this stage Cogen had commenced proceedings against Rhodia for the non-payment of invoices under the supply contract and Cogen, in turn, issued proceedings against Huntsman for failing to exercise "reasonable endeavours" to secure consent to the transfer.

The case is notable because the court was asked to consider whether there was any distinction to be drawn between the terms "reasonable endeavours" and "best endeavours". On this point, although the judge's comments were said outside the scope of the decision reached, the judge agreed that an obligation to use reasonable endeavours was less stringent than an obligation to use best endeavours. In his view:

"As a matter of language and business common sense...one would surely conclude that they did not [mean the same thing]. This is because there may be a number of reasonable courses which could be taken in a given situation to a achieve a particular aim. 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..."

The judge also agreed with the analysis of the "all reasonable endeavours" requirement adopted by the court in Yewbelle, subject to a further qualification that where the contract specified certain steps which have to be taken as part of the exercise of reasonable endeavours, those steps would have to be taken, even if that could, on one view, be said to be sacrificing a party's commercial interests.

In this case, where there was a mandatory requirement on Huntsman to provide a direct covenant, it was not a defence for Huntsman to say that in giving the guarantee it would be sacrificing its own commercial interests and be going beyond the requirements of a reasonable endeavours obligation.

Waters Lane & Anor v Sweeney & Ors

A similar position on the interpretation of these terms was recently reached in the New South Wales Court of the Appeal. In Waters Lane v Sweeney⁵ the court was required to consider the meaning of an "all reasonable endeavours" obligation contained in a Heads of Agreement for a property development proposal. Under the Heads of Agreement Waters Lane (as the developer) was to use "all reasonable endeavours" to satisfy certain conditions which related to the re-zoning of the property and the granting of a development consent by a specified date.

In order to determine the question of whether Waters Lane had used "all reasonable endeavours" to satisfy the conditions, the court adopted a test previously applied in a case dealing with a best endeavours obligation, namely that:

"an obligation to use 'best endeavours' does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object, but no more."

In the court's opinion this was directly applicable to the obligation to use all reasonable endeavours on the facts and noted that "if this means that there is no relevant difference between the standard constituted by the expression "all reasonable endeavours" and that constituted by the expression "best endeavours" then so be it." The court did not however make any final conclusion on that possibility.

COMMENT

Although these cases do not offer any conclusive statements on the use of "endeavour" obligations, they do provide some clarity on the current position likely to be taken by the courts.

An obligation to use "best endeavours" places a party under a stricter obligation than one to use "reasonable endeavours". However, the interpretation of each of these terms will ultimately depend on the surrounding wording, clauses and the contractual setting of the agreement. It is also worth bearing in mind that each of the cases referred to above indicates that none of the endeavours clauses can be used to require a party to fulfil an obligation that would be "beyond the bounds of reason".

Of course, the best way to avoid the uncertainty inherent in the use of the endeavour obligations is to specifically state what steps will and will not fall within the scope of the undertaking. As in the Rhodia case, where the contract specifies particular steps to be part of the obligation those steps will have to be taken even if it could be argued that to do so might involve sacrificing that party's own commercial interests.

Some of the more common steps to consider incorporating as part of the endeavours obligation may include:

• whether the party should have to incur any costs or expenditure (beyond a stated amount) in carrying out the obligation;

• if the approval of a government authority is required, and the approval procedure also provides for appeal to a higher authority, whether the party is required to pursue the appeal process in the event that approval is not given;

• whether the party is required to continue with its "endeavours" where the party considers to do so would be pointless;

• whether the party is required to provide a parent guarantee to secure the consent of a third party; and

• whether the party may take into account its own commercial interests.

Finally, both the English and Australian authorities infer that there is no middle ground between the terms "best endeavours" and "all reasonable endeavours" and this will need to be kept in mind when drafting or negotiating the different standards of qualification to be applied to a contractual obligation.

 

¹ IBM United Kingdom v Rockware Glass Limited [1980] F.S.R. 335

² UBH (Mechanical Services) Ltd v Standard Life Assurance Co, (Unreported) The Times, November 13, 1986

³ Yewbelle Ltd v London Green Developments Ltd & Anor [2007] EWCA Civ 475 (23 May 2007)

⁴ Rhodia International Holdings Limited & Another v Huntsman International LLC [2007] EWHC 292 (comm)

⁵ [2007] NSWCA 200

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.