What are the most common types of endeavours clauses?
Best endeavours - the most demanding obligation
Broadly speaking, a party is required to use no less than its best efforts to produce the desired results in the circumstances. This has been held to mean that such steps are all the steps which a prudent, determined and reasonable person, acting in their own interests and desiring to achieve that result, would take.
Although this is an onerous obligation, it is not regarded by the courts as an absolute one and is subject to reasonableness.
What are the key characteristics of a best endeavours clause?
- Such clauses may require significant expenditure on behalf of the obligor and can require the obligor to act against its own commercial interests, for example appealing against a court decision, diverting material resources from elsewhere within the business, or taking all reasonable courses open to it, rather than just one. However the obligor is allowed to have some regard for its own commercial interests and is not required to take action that would ruin the business or result in the utter disregard of the interests of shareholders.
- It may be overridden by other duties. For example, an obligation on the directors of a company to use best endeavours to pass a resolution does not require the directors to give bad advice to the shareholders or continue to recommend the resolution once not in the company's interests.
- The obligation is viewed from the obligee's perspective and its interests but may consider the obligor's interests.
Reasonable endeavours - the least demanding obligation
This requires the obligor to achieve an even balance between its contractual obligation to the obligee and the obligor's own commercial interests i.e. it is obliged to pursue a reasonable course to achieve the objective.
What are the key characteristics of a reasonable endeavours clause?
There are four key characteristics:
- such clauses are considered from the obligor's perspective;
- only limited expenditure is required by the obligor and the obligor does not need to sacrifice its own commercial interests (for example, its relations with third parties, its reputation and the cost of taking the action itself);
- they are less stringent than best endeavours clauses but will still "bite" provided the clause is clearly defined and held to be enforceable;
- they may well only require a party to take one reasonable course of action, not all of them.
All reasonable endeavours - the middle ground
This obligation is commonly seen as a compromise between best and reasonable endeavours but there is the least certainty over its meaning. What steps have to be taken will depend on the circumstances and the obligation may exhibit the characteristics of both best and reasonable endeavours. Case law suggests uncertainty as to whether:
- all (and not just one or some) reasonable courses of action are required to be taken as with best endeavours; and
- the obligor is required to sacrifice its own commercial interests or not.
What about variations of endeavours clauses?
There are several variations of the three most commonly used endeavours clauses: "commercially reasonable endeavours", "reasonable commercial endeavours," and "utmost endeavours." The former phrases are interpreted as being used to "soften" a reasonable endeavours obligation, whilst the latter is commonly seen as an advancement on a best endeavours clause. However, whether it is possible to "dress-up" endeavours clauses in this way remains uncertain.
How can certainty be achieved when using endeavours clauses?
There will always be an element of uncertainty as to what is being agreed to when using endeavours clauses. Importantly, although the meaning of the clause must be construed using the normal rules of contract interpretation (i.e as against the relevant contractual and factual background, including the commercial context at the time the contract is formed), whether or not the obligation has been satisfied is considered against the position at the time of performance and is therefore fact sensitive.
Consideration should be given to the following:
- recipients of an endeavours obligation should make sure that the clause is sufficiently certain to be enforceable. An obligation to endeavour to reach an agreement is no different from an agreement to agree and, as such, is unenforceable;
- obligors should avoid agreeing to use best endeavours unless comfortable that the obligations can be fulfilled without having to expend sums beyond what is budgeted for. Consider setting a financial cap on the pursuit of the obligation;
- define what is meant by the relevant endeavours obligation for the purposes of the contract. However, this may be difficult to draft if used frequently in the same contract and may prove to be an obstacle in negotiations;
- spell out precisely what steps a
party is required to take to fulfil a qualified obligation rather
than simply relying on an endeavours clause. This should include:
- whether the obligor must bear any costs or incur any expenditure and, if so, how much;
- specific steps that the obligor is or is not expected to carry out;
- the period for which the obligor should pursue that objective;
- whether the obligor must take legal action or appeal to achieve the objective;
- whether the obligor must inform the obligee of its progress in meeting the objective;
- whether the obligor must step aside if it is unsuccessful and allow, or even assist, the obligee to solve the problem itself and, if so, the consequences (if any);
- the extent to which a party is entitled to protect its own interests, is required to act in the interests of the other party, or meet an objective standard of behaviour. These issues are, in part, determined by the type of endeavours clause used but it may be useful to set them out expressly; and
- what happens if the object of the endeavours is not, or cannot be, achieved despite achieving the specified standard of endeavours. Can the contract be rescinded or can the requirement be waived and the contract continued and if so, on the same or different terms?
- avoid using untested variations of endeavours clauses which could create yet further uncertainty;
- if an endeavours obligation has been agreed, keep records of the efforts taken to fulfil it as evidence of what has or has not been done should a dispute arise.
By following the above practical points, there will be less scope for argument as to what was intended and, consequently, whether what was intended has been achieved - or not.
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.