What does it really mean when a contract requires you to use "reasonable endeavours" or "best endeavours"?
Many commercial contracts include obligations for the parties to use "reasonable endeavours" or "best endeavours". Australian Courts have previously held that there is no significant difference between these expressions.
However, what is meant by these expressions is subjective. This means that parties will often have different understandings of what has been agreed.
The High Court provided some insight into how it interprets "reasonable endeavours", in a recent case, Woodside Energy Ltd & Ors v Electricity Generation Corporation t/as Verve Energy [2014] HCA 7.
The contract here was a long-term agreement requiring several sellers to provide a maximum daily quantity of gas to the purchaser. The contract required the sellers to use "reasonable endeavours" to make an additional maximum daily amount of gas available to the purchaser, at a set price. It also said the sellers could take into account all "relevant commercial, economic and operational matters" when considering whether they were able to supply the additional maximum daily amount of gas to the purchaser.
After a reduction in supply of gas to the market, prices increased and the sellers decided they were unable to supply the purchaser with the additional maximum daily amount of gas at the contract price. Instead they offered it at the market price, which was higher than the contract price.
The Court decided that the sellers were within their rights to decline to supply the additional maximum daily amount of gas at the contract price, given the contract's stipulation that they could take into account "relevant commercial, economic and operational matters."
The decision provides useful guidelines on the meaning of "reasonable endeavours" when the language of the contract qualifies the obligation.
- The obligation to use reasonable endeavours is not an absolute or unconditional obligation.
- The nature and extent of the obligation is qualified by what is reasonable in the circumstances, which can include circumstances affecting a party's own interests.
- Contracts containing this kind of obligation can contain and define their own standard of reasonableness.
The High Court said that it will interpret the terms of a commercial contract according to what "a reasonable businessperson would have understood those terms to mean." This involves considering:
- the language used by the parties
- the circumstances known to the parties
- the commercial purpose of the contract.
The case demonstrates the uncertainty caused by using subjective language such as "reasonable endeavours" or "best endeavours" and by qualifying the performance of the obligation with more general language. It is preferable to avoid general language when drafting a contract.
Nevertheless, "reasonable endeavours" and "best endeavours" clauses are included in many agreements. They are commonly used to resolve deadlocks in negotiations between a party seeking a desired outcome in a particular future eventuality and the performing party who does not want to be under a binding obligation to achieve that outcome.
If a contract must include a "reasonable endeavours" or "best endeavours" obligation, we encourage negotiators to qualify it with specific and objective boundaries.
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.
