05 May 2005

Best v reasonable endeavours: Is there any difference?

by Owen Hayford, Vanessa McBride

Recent Australian case law suggests that "best endeavours" and "reasonable endeavours" create the same obligation and there is no substantive difference between the two. Even so, where both terms are used in the same contract, Australian courts may still feel compelled to find a difference.

Contracts regularly include clauses which oblige one or both parties to use their "best endeavours" or "reasonable endeavours" to perform the terms of the contract or to reach the contractual objective. Endeavours clauses may be express or implied. They are often used within construction contracts where there is some uncertainty about a party's ability to achieve a specific objective (perhaps where a third party's action or decision is required). In this context, "efforts" are synonymous with "endeavours", though the clauses are generally referred to as "endeavours" clauses. In the process of drafting, much time may be spent negotiating whether "best", "reasonable" or "all reasonable" endeavours should be the term used. This terminology is considered important because the contractual term will only be breached if the requisite endeavours are not used. Failure of a party to fulfil the actual objective will not of itself render the party liable.

In early English case law, these "endeavours" clauses were established as placing different levels of strictness or difficulty in meeting the obligations. A "best endeavours" clause required a party to "leave no stone unturned" and do all that was possible without unreasonably damaging its own business to achieve the contractual objective.[1] This may include initiating litigation or prosecuting an appeal on a decision, and it may require significant expenditure by the party subject to the "best endeavours" obligation. On the other hand, "reasonable endeavours" simply required that a party not hinder or prevent the fulfilment of the contractual purpose. "Reasonable endeavours" required the obligor to give "an honest try".[2]

Australian interpretation

Over the past two and a half decades the interpretation of these clauses has changed. Australian judicial opinion has moved away from that in England where the "endeavours" clauses remain differentiated according to the standard of difficulty in fulfilling the different obligations.

"Best endeavours"

The High Court of Australia has held that a "best endeavours" clause "prescribes 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."[3] Thus it can be seen that Australian courts will not require a party subject to a "best endeavours" clause to do anything beyond what is reasonable in order to satisfy its obligations. In another High Court case, it was held that "an obligation to use '"best endeavours" does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object but no more."[4]

"Reasonable endeavours"

There has been less judicial comment on the interpretation of "reasonable endeavours" clauses. The obligation has been defined in Australia as "a fair, proper, and due degree of care and ability as might be expected from an ordinarily prudent person with the same knowledge and experience as the defendant, engaging in the defendant's particular conduct or omission and under the particular circumstances."[5] This definition mirrors the "best endeavours" obligation as stated in the English courts which requires the party to take all those steps, "being steps which a prudent, determined and reasonable owner, acting in his own interests and desiring to achieve that result, would take."[6] In a 1993 case, a "reasonable endeavours" clause required a party to spend $270 000 for an approval by the Water Board.[7] This significant monetary outlay was considered reasonable because it was foreseeable (although unknown) at the date of the contract.

"Best" v "reasonable" endeavours

Although no judge has actually said in plain language that "best endeavours" and "reasonable endeavours" create the same obligation and there is no substantive difference between the two, it is evident from an analysis of recent case law that that is the current interpretation within Australia. The cases state that a party's self-interest, or the conflicting interests of third parties, may take precedence over the "best endeavours" obligation where it would be beyond the bounds of reasonableness to give priority to the other party's interests. A plaintiff under a "best endeavours" clause was not required to make further inquiries of a bank after it rejected an application for finance. An undertaking to use "best endeavours" to promote the sale of one product does not necessarily impose an obligation not to sell a competing product. The main limitation, or characterising feature, of a "best endeavours" clause is the constraint of reasonableness.

Both "best" and "reasonable" endeavours allow a party under the obligation to take into account its own commercial interests and third party interests. If complying with either clause would be unprofitable for the obligor, the obligor can refuse to engage in the futile exercise of committing its resources to achieve the contractual purpose. A party need not breach its own contract or the general law in order to fulfil its obligations under an endeavours clause. If a party must use "best" or "reasonable" endeavours to obtain a development approval which involves a substantial detriment or payment which was not foreseen by that party at the date of entry into the contract, then they will not be required to undergo the detriment or payment. If an obligor could have done more to try and achieve the objective but failed to do so, the obligor will not be in breach of his/her obligation if making the identified efforts would not have made any material difference to the outcome.

Conclusions

From the case law in Australia it is evident that courts will read down a "best endeavours" clause in commercial agreements so that it is no more onerous than a "reasonable endeavours" clause. As such, the ambiguous meaning of "all reasonable" endeavours which was supposed to be within the domain between "best" and "reasonable" endeavours is resolved as being synonymous with both. Whichever terminology is used, the obligor must weigh up his/her commercial considerations against the actions required to fulfill the contractual objective, and do no more than what is within the bounds of reason to carry out that objective. Commentators on this issue over the last five years have agreed that while the distinction between endeavours clauses in England has been maintained, there is little or no difference between them in Australia. At least one English commentator goes so far as to suggest that the clauses have become identical in England as well. In each case, the obligation that the endeavours clause will impose must be determined objectively from the date of the contract and with regard to all the circumstances of that particular case.

Notwithstanding these observations, it is yet to be seen how an Australian court would construe the "best" and "reasonable" endeavours clauses within a single contract. It may be that where both terms are used in respect of different obligations in one contract, the court will feel compelled to construe "best endeavours" as creating a greater obligation than "reasonable endeavours".

Practical implications

Some writers recommend that endeavours clauses should simply not be used within contractual drafting at all. Others suggest that if one must be used, "reasonable endeavours" should be chosen to avoid unrealistic expectations in the mind of either party. The main recommendation here is that where endeavours clauses are used in contract, ideally the clause should refer to objective criteria by which such endeavours are to be measured. Where possible, the parties' actual intention should be reflected in the drafting of the agreement by describing exactly what they mean by "best" or "reasonable" endeavours, and what considerations ought to be weighed up in determining whether the obligation has been satisfied. This, however, is often easier said than done in the context of commercial negotiations, which is why "endeavours" clauses commonly appear in negotiated agreements.

 

[1] Sheffield District Railway Co v Great Central Railway Co (1922) 27 TLR 451

[2] UBH (Mechanical Services) Ltd v Standard Life Assurance Co (unreported, The Times, 13 November 1986)

[3] Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83 per Mason J

[4] Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 per Gibbs J

[5] Australian Securities Commission v Gallagher (1994) 11 WAR 105

[6] IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335

[7] Graeme Webb Investments Pty Ltd v Soerpyk Pty Ltd (1993) NSW ConvR 55-661

 

Related Knowledge

Get in Touch

Get in touch information is loading

Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.