|Focus:||Assessing the implications of a party having to use 'best endeavours' or 'reasonable endeavours' to achieve a particular contractual objective|
|Services:||Property & projects|
During a lease negotiation, have you ever been unable to agree on the terms for delivery of a crucial measure that is intended to get the landlord-tenant relationship off to a positive start (such as obtaining development consent for the proposed use)?
In this, the third instalment of our three part series examining standard lease terminology, we assess the implications of a party having to use 'best endeavours' or 'reasonable endeavours' (and variations on that theme) to achieve a particular contractual objective.
Commercial parties view these expressions as an expedient means of resolving deadlocks in negotiations over absolute obligations to achieve a contractual objective. Accordingly, it is important to understand these expressions, and which might best be used in the circumstances.
The established meaning of 'Best Endeavours' and 'Best Efforts'
An obligation to use 'best endeavours' (or the interchangeable 'best efforts') to achieve a contractual objective has an established meaning as a result of the cases in which that term has been considered. In the leading case of Hospital Products Ltd v United States Surgical Corporation, Gibbs CJ of the High Court held that an obligation to use 'best efforts' necessarily includes an obligation not to hinder or prevent the fulfilment of the purpose of the contract, but did not require the person undertaking the obligation to go beyond the bounds of reason.
Later decisions such as Hawkins v Pender Bros Pty Ltd and Centennial Coal Company Ltd v Xstrata Coal Pty Ltd emphasise that a party's obligation to use 'best endeavours' requires it to exhaust all courses of action to the point where the prospects of success are so remote that further endeavours would be wasted. Even where there is apparently no realistic chance of achieving the contractual objective, the obligated party may have to wait to see if circumstances change to allow the objective to be achieved.
These observations mean that, if a person is obliged to use 'best endeavours' to achieve a contractual objective and their first reasonable effort fails, they may be required to take further action, if other options with a reasonable chance of achieving that objective still exist. However, a course of action will not fall within the scope if it undermines a party's commercial standing or may lead to financial ruin.
'Reasonable Endeavours' and 'All Reasonable Endeavours'
It is not clear whether an obligation to use 'reasonable endeavours' to achieve a contractual objective is less onerous than an obligation to use 'best endeavours'. In Electricity Generation Corp v Woodside Energy Ltd, the High Court did not have to decide this question but noted that the case proceeded on the basis that 'substantially similar obligations are imposed by either expression'.
Writing in his personal capacity, Lewison LJ of the English Court of Appeal has suggested that 'reasonable endeavours' requires a party to take a reasonable course of action to achieve the contractual objective (but not all reasonable courses, thereby affording the obligor freedom to choose the most suitable course for them or their business), whereas an obligation to use 'best endeavours' requires a party to take all reasonable courses possible. There is some support for this in the Australian case law. In Stepping Stones Child Care Centre (ACT) Pty Ltd v Early Learning Services Ltd, Refshauge J of the ACT Supreme Court held that 'reasonable endeavours' is a lesser standard than 'best endeavours'. In Woodside Energy, the High Court observed that the nature and extent of an obligation imposed in such terms is necessarily conditioned by what is reasonable in the circumstances, which can include circumstances that may affect an obligor's business.
On the face of it, one would think that there would be little (if any) difference between an obligation to use 'reasonable endeavours' and an obligation to use 'all reasonable endeavours'. However, a series of cases in the New South Wales Court of Appeal culminating in the decision in Centennial Coal Company Ltd v Xstrata Coal Pty Ltd suggest that an obligation to use 'all reasonable endeavours' is substantially similar if not identical to the obligation to use 'best endeavours'. The point remains undecided by the High Court, and until a decision is reached, it would be best to avoid using the term 'all reasonable endeavours'.
When in doubt, spell it out
It is always open to the parties to prescribe in their contract either what is meant by any of the terms discussed above or what is excluded from the scope of any of these terms. This allows the parties to identify what is covered by an obligation to use 'best endeavours' or 'reasonable endeavours' to achieve a contractual objective, rather than leaving it to a court to do so.
Lessons and pointers to note
The following lessons and pointers emerge from the cases.
- 'Best endeavours' is well understood in the case law to mean all courses of action. If you are unwilling or ill-equipped to exhaust all courses of action in trying to achieve the contractual objective, it would be prudent to specify what actions are excluded from the 'best endeavours' standard.
- 'Reasonable endeavours' remains a viable alternative to 'best endeavours'. Although it is not as well understood in the case law as yet, it may give you the latitude to decide which course of action best suits you from a commercial perspective.
- The term 'all reasonable endeavours' is best avoided as it may be confused with 'reasonable endeavours'. If you must use 'all reasonable endeavours', it would be prudent to specify what actions are excluded from the 'all reasonable endeavours' standard.
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.