16 Jun 2011
All the best? Drafting and interpreting endeavours clauses in contracts
Although there's no substantive difference between "best endeavours" and "reasonable endeavours", you should still be careful when drafting and interpreting agreements.
Requirements for a party to use its "best" or "reasonable" endeavours are regularly seen in a broad range of energy and resources contracts. These provisions exist because there is doubt over:
what the ultimate contractual objective is. For example, endeavours clauses are found in sales agreements where there is no particular sales target; and/or
whether the contractual objective itself can be achieved. In this respect, endeavours obligations are regularly imposed in relation to, for example, registrations of plans and permits or approvals of transactions.
Early cases on the meaning of "best endeavours" adopted a literal approach to the phrase which pivoted around the characterisation of the word "best". In one matter, for example, an English court held that "best endeavours" "means what the words say; they do not mean second best endeavours ... the words mean that [the promisor] must, broadly speaking, leave no stone unturned".
Eventually, the courts adopted a commercial approach to the interpretation of this phrase, moving away from the "natural" meaning of "best", so that the obligation did not "mean everything possible under the sun", but involved a consideration of what a party could reasonably do in the circumstances.
Recent Australian cases have continued to interpret "reasonable endeavours" obligations using the same approach so that, subject to the facts, and the intentions of the parties, there appears to be no substantive difference between "best endeavours" and "reasonable endeavours".
Satisfying an endeavours obligation
Australian courts have considered the following factors when determining whether or not a party has satisfied its endeavours obligations:
1. the nature of the responsibilities of the promisor, together with its capacity and qualifications; and
2. the extent to which the promisor has attempted to honestly fulfil its obligations, having regard to the contract as a whole.
The second question essentially involves considering two issues:
what reasonable steps would the promisor need to take to achieve the subject of the endeavours obligation; and
what is a reasonable timeline for those steps, having regard to the time when the subject of the endeavours obligation falls due and the promisor's capacity and qualifications?
A few practical considerations flow from all of this which are relevant to drafting or interpreting endeavours obligations.
Drafters may wish to refer to "reasonable endeavours" to avoid the parties' having unrealistic expectations about the obligations imposed on the promisor.
If one endeavours standard is intended, "best endeavours" and "reasonable endeavours" should not be used in the same agreement.
The parties should not only consider what, objectively, a promisor should or should not reasonably do with respect to the relevant obligation, but also what a promisor can or cannot do as well.
This is an important consideration, for example, for a promisor who may find that the standard of its obligation is higher because of its capabilities or experience because the parties failed to , include specific criteria for the endeavours obligation.
The parties may consider setting out the kinds of actions the promisor is expected to take, or not take, with respect to the endeavours obligation.
This can be achieved by inserting some criteria that go towards defining the content of the endeavours obligation. For example, the relevant contract may include an indicative timetable of when certain activities are to take place, or if a party is expected to incur expenses or commence litigation.
Alternatively, the parties may benchmark the expected performance by an accepted or acknowledged standard, such as one which is accepted in the parties' industry or is consistent with their experience.