31 Mar 2008

Best v reasonable endeavours, a few years on

by Owen Hayford, Vanessa McBride

There is no substantive difference between "best", "all reasonable" and "reasonable" endeavours.

In May 2005, we asked whether there is any substantive difference between "best endeavours" and "reasonable endeavours" as used as contractual terms for the performance of contractual objectives.

Now, two and a half years later, prompted by the NSW Court of Appeal’s recent examination of the issue, we review the situation.

The previous situation - and the open question

It is clear from a review of Australian case law over the past two decades that Australian judicial opinion has moved away from the English law in which a differentiation between "best" and "reasonable" endeavours has been maintained. The primary authority on this topic in Australia is the High Court case of Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41. In that case, Chief Justice Gibbs 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".

On this basis, and with the support of other Australian judicial authority, we concluded that, while no judge has given clear expression of this principle, there is no substantive difference between "best" and "reasonable" endeavours in the context of judicial interpretation. We left open, however, the question of how an Australian court would construe the "best", "reasonable" and "all reasonable" endeavours clauses where they arise within a single contract.

Further, the issue of what is required to satisfy an obligation to use "all reasonable" endeavours has always been uncertain, as it has supposedly lain betwixt the twin ambiguities of "best" and "reasonable" endeavours. Our conclusion was that all three terms are effectively synonymous. The NSW Court of Appeal’s decision provides a firmer answer to this issue and to our open question.

Clarification by the Court: Waters Lane v Sweeney

The Sweeneys owned a 200 hectare property used as a horse riding range at Denham Court, just north of the main business district of Campbelltown. Waters Lane Pty Limited and its owner Mr Howard saw potential to develop the property for residential use. In December 2003, the parties entered into a Heads of Agreement in relation to the development of the property and its prospective purchase by one of Mr Howard’s companies.

The Heads of Agreement included clause 4.1 which required Waters Lane to use "all reasonable endeavours" to satisfy certain conditions subsequent (such as obtaining rezoning and development consents for the property) by the sunset date. The sunset date of 9 March 2006 could be adjusted by Waters Lane serving a notice on the Sweeneys to extend the date for a further two years, or any other extension claimed by Waters Lane. Waters Lane never exercised its right to extend the sunset date. The Court found that the obligation on Waters Lane to use "all reasonable endeavours" to satisfy the conditions subsequent by the sunset date was fundamental and went to the root of the Heads of Agreement.

The Sweeneys contended that there were more than just semantic differences between an obligation of a party to use its "best endeavours", "all reasonable endeavours" or "reasonable endeavours". They pointed out that the Heads of Agreement uses each of these standards of endeavour and accordingly they must represent a gradation of obligations.

The Court stated that there was

"…no reason not to adopt the words of Gibbs CJ in Hospital Products that cl 4.1 required Waters Lane to do all it reasonably could in the circumstances to satisfy the Conditions Subsequent by 9 March 2006 although it was not required in doing so to go beyond the bounds of reason.

If this means that there is no relevant difference between the standard constituted by the expression ‘all reasonable endeavours’ and that constituted by the expression ‘best endeavours’ then so be it. However, it is unnecessary to express any final conclusion on that possibility. Suffice it to say that in the present case the description articulated by Gibbs CJ in Hospital Products of what is required to satisfy the obligation to use ‘best endeavours’ is directly applicable to the obligation to use ‘all reasonable endeavours’ in cl 4.1."

It then considered what Waters Lane had done in order to satisfy its obligations under the "all reasonable endeavours" clause. Mr Howard did not inform the Council as to how many retirement village dwellings were required by the Heads of Agreement to be the subject of the rezoning and development consents. Instead, Mr Howard informed Council of a lower number of dwellings to gauge Council’s response before attempting to increase the density of the development. Nor did he inform the project manager that the sunset date was 9 March 2006. She believed that she had an additional two years in which to obtain the required consents.

This "softly, softly" approach was "commercially prudent, cost effective and involved a realistic appreciation of the difficulties which could only be adequately addressed by a careful step-by-step process", however:

"…the obligation to use all reasonable endeavours required Waters Lane to take whatever steps were reasonably necessary to maximise its chance of achieving as much as possible by 9 March 2006. If that required the expenditure of funds to carry out the necessary studies so as to be in a position to lodge a rezoning application as soon as it was appropriate to do so, then cl 4.1 mandated that those studies be commissioned as soon as practicable even if, ultimately, they had to be modified or even abandoned due to the Council indicating, for instance, that it would simply not entertain any proposal to rezone the Property."

The Court concluded that "although the "softly, softly" approach may have been commercially prudent from the appellants’ perspective, it was inconsistent with the obligation to use all reasonable endeavours to satisfy the Conditions Subsequent by [the Sunset Date]."

It also noted that the difficulty of the task has no bearing on the content of what is reasonable, as the obligation to use all reasonable endeavours is governed by an objective standard of what is reasonable.

Conclusions

Once again the judiciary has refrained from providing clear authority as to whether any substantive difference exists between the "endeavours" obligations. The New South Wales Court of Appeal has however contributed to the body of case law that indicates a judicial tendency to require the same level of obligation under each of the "endeavours" standards.

In this case, although the judges were not required to compare the obligations between the clauses that required each of "best", "reasonable" and "all reasonable" endeavours within the same contract, the Court required the "all reasonable endeavours" clause to be interpreted in accordance with Chief Justice Gibbs’ elucidation of a "best endeavours" clause with full recognition that to do so may indicate there is no difference between the standard required for "all reasonable endeavours" and "best endeavours".

Our previous conclusions, that no substantive difference exists between "best", "all reasonable" and "reasonable" endeavours, are reaffirmed by this recent decision from New South Wales.

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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.