"Endeavours" obligations: the importance of clarity within contracts

Updated November 2010

Often you hear solicitors talk about "best" and "reasonable" endeavours obligations when they negotiate contracts. But what do these phrases mean? Should you ever accept an obligation to use your "best endeavours" to achieve a particular event? Does only accepting a "reasonable endeavours" obligation give you a good excuse not to carry out a particular action if you don't want to?

There are different types of obligation in any legal contract. A party may be under an absolute, unqualified obligation to achieve or procure a particular objective. Often, absolute undertakings are negotiated and qualified so that the relevant party only has to use a certain standard of efforts to obtain the expected result. For example, a party may not want to have an obligation to obtain planning permission for a particular development since that party cannot directly control whether or not the permission will be granted. However, the party may be willing to accept an obligation to use either their "best" or "reasonable" endeavours to obtain the desired planning permission.

Best endeavours

If someone agrees to use their best endeavours to achieve a certain result, then they must take all steps in their power 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. Therefore a best endeavours obligation is not an absolute undertaking to do or procure something and there is some level of reasonableness even in this type of obligation. For example, the obligation does not require the relevant party to carry out actions that would be the certain ruin of that party. A best endeavours obligation may also be overridden by other duties owed by that person, such as a director's fiduciary duties to a company and its shareholders. In the case of Rackham v Peek Food [1990] BCLC 895 an obligation on the directors to use their best endeavours did not require the directors to give bad advice to the shareholders and continue to recommend the resolution once it ceased to be in the company's interests.

However, agreeing to do something to your best endeavours does impose an onerous obligation on you and usually requires you to do all that is within your power to get the result, including spending money if necessary. An obligation to use best endeavours may impose an obligation to litigate or appeal against a decision.

It is very rare that a well-advised party will be willing to give a best endeavours obligation to achieve a certain result if they were unwilling to give an absolute obligation. However it may be appropriate to insist on the other party achieving something to their best endeavours depending on the circumstances and importance of the action required.

Reasonable endeavours

Although it is generally accepted that the phrase to use "reasonable endeavours", often used in contracts, incurs less stringent obligations, it is not certain exactly where the standard lies. It is definitely not a toothless obligation so that the obligor can drop trying to achieve the event for no particular reason. If someone must use their reasonable endeavours, then the obligor should balance its contractual obligation against all commercial obligations, such as their relations with third parties, reputation and the cost of that course of action. The relevant party who has to comply with the obligation is not required to sacrifice its commercial interests. All of these considerations depend on the facts of the particular circumstances.

Any party taking on even a reasonable endeavours obligation should carefully consider what actions it is going to have to take to satisfy their undertaking. Depending on the circumstances, a party may be required to take legal action even if that party has only agreed to give a reasonable endeavours obligation.

The courts in the case of Rhodia International Holdings Ltd v Huntsman International LLC [2007] EWHC 292 held that a buyer had not used its reasonable endeavours to obtain the consent of an energy supplier to the transfer of a contract after the sale and purchase of a business, since the buyer's parent company would not provide a guarantee to the third party contractor. The buyer's obligation to use its reasonable endeavours to obtain the consent for the transfer was set-out in the sale agreement with the seller, along with an express provision requiring the buyer to procure any parent company guarantee requested by the third party contractor. This case highlights how it is key that if there are specific actions that a party requires the other party to carry out, these need to be expressly included so that there is no doubt over obligations of the parties.

All reasonable endeavours

It is often thought that "all reasonable" endeavours obligations is somewhere between "best" and "reasonable" endeavours. However, the meaning of "all reasonable" endeavours is even less clear than the meaning of "best" and "reasonable" endeavours. All reasonable endeavours obligations have been equated to best endeavours obligations but, recently the courts stated that an all reasonable endeavours obligation would not always require the obligor to sacrifice its commercial interests (CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010] EWHC 1535). On the facts of this particular case the obligation was to use "all reasonable but commercially prudent endeavours", so the obligor was required to take all reasonable steps in so far as they are commercially prudent, but no further than this standard.

Unenforceable obligations

All obligations are only legally enforceable if they are sufficiently certain, therefore endeavours obligations may be unenforceable if they are poorly defined. The most common example is that an obligation to use reasonable endeavours to agree a particular agreement, or to negotiate and agree such a document, is unenforceable. To ensure that any type of endeavours obligation is enforceable, it is key that the obligor's actions and the event to be achieved are clearly and precisely defined.

Summary

Although different types of endeavours obligations are very common in agreements, don't automatically assume that these phrases have clear meanings and will be easily enforceable. Uncertainty can be reduced by listing any particular steps the person under the obligation has to take as in the Rhodia case mentioned above. The detail will always depend on the particular circumstances and type of event to be achieved, but it may be helpful to consider some of the points listed below so the parties cannot, after the signing of an agreement, dispute what is expected of them:

• What level of costs should the obligor have to expend in ensuring that they achieve the result?
• How long should the obligor have to try and get the desired result for?
• Are there any particular actions that the obligor should take?
• Should the obligor be under a duty to take legal action or appeal against any unfavourable decisions?

You should always carefully consider the actions you will be required to do when taking on any type of endeavours obligation. Some solicitors may use an endeavours obligation as a quick way of getting a point agreed between the parties, but such phrases may store problems for the future if the contract does not set out what each party expects of the other.

For more information on obligations please contact Andrew Webber or Alice Gardner.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2010. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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