This is one of a series of articles in which we review the judicial interpretation of some words and phrases that are commonly used in contracts. In this article we look at the meaning of the phrase "best endeavours".
The obligation to use "best endeavours", "reasonable endeavours" or "all reasonable endeavours" is often used in contracts where a party's obligation is not absolute. This may be because the objective is not totally within the party's control, the required actions are not known at the time of the agreement, the party is not prepared to make an absolute commitment or definitive measurement of the objective is not possible. For example, in a distribution agreement, the distributor often undertakes to use "best endeavours" or "reasonable endeavours" to promote sales.
So, what does each of "best endeavours", "reasonable endeavours" and "all reasonable endeavours" mean? Do they give rise to meaningful obligations and do they have different meanings?
There is some variance between the English and Australia legal interpretations of these phrases and the distinction between them.
The Australian Position
Australian courts have not identified any substantive distinction between the terms "best endeavours", "reasonable endeavours" and "all reasonable endeavours".
Transfield Pty Ltd v Arlo International Ltd1
The High Court in Transfield considered a "best endeavours" provision in a licence agreement. Under the agreement, Transfield covenanted "to use its best endeavours" to sell Arlo's poles. Transfield subsequently carried out construction work for the NSW Electricity Commission using its own poles rather than Arlo's poles.
One of the issues the High Court had to consider was whether the "best endeavours" obligation meant that Transfield could not use competing poles. Mason J considered that the obligation "prescribed a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in the light of the particular contract". Applied to this context, his Honour held that Transfield was required to use all its efforts and skills towards the selling of Arlo's poles to the extent that it was reasonable to do so in the circumstances, but that there was no adequate basis for importing into this positive obligation a negative implication that Transfield must not use or sell a pole that competed with Arlo's poles.
A similar conclusion was reached by the High Court in Hospital Products Ltd v United States Surgical Corporation2 in which the Court noted:
"an obligation to use "best endeavours" does not require the person who undertakes the obligation to go beyond the bound of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object, but no more."
Centennial Coal Company Limited v Xstrata Coal Pty Ltd3
The 2009 case of Centennial Coal generated significant legal commentary regarding what was perceived as a renewed statement as to the illusory nature of the distinction between "best endeavours" and "reasonable endeavours".
Centennial Hunter entered into an asset sale agreement with Xstrata to sell its Anvil Hill coal mine in the upper Hunter Valley region to Xstrata. Under the agreement, Centennial Hunter and Xstrata were required to use "all reasonable endeavours" to ensure that certain rights under an arrangement between Newcastle Coal Infrastructure Group (NCIG) and Centennial Coal (Centennial Hunter's parent) were transferred to Xstrata. The sale was completed, but the transfer of the NCIG interest did not occur. Centennial Coal and Centennial Hunter brought proceedings in the NSW Supreme Court seeking declarations that they had discharged their obligation to use all reasonable endeavours to bring about the transfer of the NCIG interest.
Brereton J, whose judgment was affirmed on appeal, rejected Centennial's application. While the clause in question was framed as an "all reasonable endeavours" clause, it was equated to a "best endeavours" clause. Brereton J held that the effect of a "best endeavours" clause depends on the wording of the obligation and the circumstances of each case. Such a clause posits an objective standard requiring the obligor:
- to do what can reasonably be done in the circumstances to achieve the contractual object;
- not to hinder or prevent achievement of the contractual object;
- to continue to endeavour until the obligor reasonably judges in the circumstances that further efforts would have such remote prospects of success that they are simply likely to be wasted; and
- to allow for events, including extraordinary events, as they unfold.
Applying these principles to the facts, it was found that once completion of the sale had occurred, the obligation to "use all reasonable endeavours" to transfer the NCIG interest as soon as reasonably practicable was a continuing one. Although it was not at that time reasonably practicable to achieve the proposed transfer, this did not mean that it would not be in the future, since circumstances could change.
Cypjayne Pty Limited v Babcock & Brown International Pty Ltd4
Under an agreement relating to the purchase of a retirement village, the purchaser (a company within the Babcock & Brown Group) was obliged to use "reasonable commercial endeavours" to ensure conditions precedent to the agreement were satisfied as quickly as possible. The purchaser later withdrew from the proposed transaction when it was unable to obtain financial support from its related parties.
The NSW Court of Appeal held that the purchaser did not breach its "reasonable commercial endeavours" obligation.
Bathurst CJ considered that the use of the word "commercial" indicated that the parties contemplated the possibility of some commercial step being needed to effect the agreement. His Honour observed that both parties knew that the purchaser did not have the capacity to enter into the transaction without the support of its related companies. In this context, the purchaser was obliged to take steps reasonably available to it to put itself in a position where it could enter into the transaction or cause a related company to do so. However, if such endeavours did not result in a related company being prepared to enter into the agreement or the purchaser being financially able to do so, the "reasonable commercial endeavours" obligation did not require the purchaser to proceed with the transaction.
Applying this analysis, the Court of Appeal concluded that the steps taken by the purchaser, namely submitting a detailed request for funding to the Group's internal finance department and recommending the proposed transaction, constituted compliance with its "reasonable commercial endeavours" obligation.
The English Position
In contrast to the Australian courts, the English courts have given a distinctive meaning to each of the phrases "reasonable endeavours", "best endeavours" and "all reasonable endeavours".
"Reasonable endeavours" is defined by reference to an objective standard of what an ordinary competent person might do in the same circumstances.5 Unless expressly specified in the contract, a party will not be required to sacrifice its own financial interest, and can take selfish or commercial motives into account6.
"Best endeavours", on the other hand, means that the party under the obligation must "leave no stone unturned"7 and must "take all those steps in their powers which are capable of producing the desired results... being steps which a prudent, determined and reasonable [person], acting in his own interests and desiring to achieve that result would take"8. While a "best endeavours" obligation is still qualified by a test of reasonableness and would not require a party to take steps which would lead to "certain ruin of the company"9, something more than reasonable endeavours is required in the fulfilment of this obligation.
"All reasonable endeavours" was traditionally considered to be a middle position somewhere between best and reasonable endeavours. However more recent English cases seem to suggest that there is not much difference between "all reasonable endeavours" and 'best endeavours"10.
In an Australian context, the choice between "best endeavours" and "reasonable endeavours" will have no significance in itself. Both terms have the same meaning, although the meaning of an obligation to use best endeavours or reasonable endeavours in a particular contract will be construed in the context of:
- the contract as a whole; and
- the circumstances in which the contract was made; and
- what is reasonable in the circumstances.
When agreeing to an "endeavours" obligation, it therefore doesn't make sense to spend much time on seeking "best" over "reasonable" or vice versa. However, you should keep in mind the following:
- The obligations arising from the statement are likely to be limited and qualified.
- One phrase should be used consistently in an agreement if the standard across all endeavours obligations in the agreement is intended to be the same.
- Consideration should be given to specifying what actions are required (or are specifically not required) to satisfy the obligation, such as:
- whether the party needs to incur expense or if so, how much;
- whether the party is required to resort to litigation to achieve the objective (if relevant);
- if there is an industry standard or benchmark that can be referenced;
- the time period during which the efforts must be made.
The assistance of Chuanchan Ma, Graduate, of Addisons in the preparation of this article is noted and greatly appreciated.Footnotes
1 (1980) 144 CLR 83 (hereafter
2 (1984) 156 CLR 41.
3 (2009) 76 NSWLR 129 (hereafter Centennial Coal).
4  NSWCA 173 (hereafter Cypjayne).
5 A.P. Stephens v Scottish Boatowners Mutual Insurance Association (The Talisman)  1 Lloyd's rep 535.
6 Phillips petroleum Company United Kingdom Ltd v Enron Europe  CLC 329.
7 Sheffield District Railway Co v Great Central Railway Co (1911) 27 TLR 451 per Lawrence J.
8 IBM United Kingdom Ltd v Rockware Glass Ltd  FSR 335.
9 Terrell v Mabie Todd & Co  2 TLR 574.
10 Rhodia International Holdings Limited & Anor v Huntsman International LLC  2 All ER (Comm) 577 (obiter); Jet2.Com Limited v Blackpool Airport Limited  EWHC 1529.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.