21 Sep 2011

What does it mean to exercise "reasonable commercial endeavours"?

by Lina Fischer

When inserting an obligation to use "best endeavours" or "reasonable endeavours" in a contract, you should consider what this actually means to the parties and list any specific steps that must be taken towards complying with it

Parties often qualify contractual obligations by making them subject to the use of "best endeavours" or "reasonable endeavours". Obligations are typically qualified in this way when it is uncertain whether or not a party will be able to meet the obligation because of circumstances outside of its control, for example where a third party's agreement is required.

The expressions "best endeavours" and "reasonable endeavours" have generally been considered by the courts as imposing similar obligations. This was confirmed in Cypjayne Pty Ltd v Babcock & Brown International Pty Ltd [2011] NSWCA 173.

The phrases "best endeavours" and "reasonable endeavours" have been described by the courts as:

  • a standard of reasonableness and 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 party in light of the particular contract (Transfield Pty Ltd v Arlo International Limited [1980] HCA 15 per Mason J);
  • an obligation to do all that could be reasonably expected having regard to the circumstances of the party's business operation (Transfield per Wilson J); and
  • implying an obligation that the party will not hinder or prevent the fulfilment of the objective (Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64 per Gibbs CJ).

Obligation to use reasonable commercial endeavours

The contract in Cypjayne required the parties to use "reasonable commercial endeavours" to ensure that the conditions precedent to the contract were satisfied as quickly as possible.

The use of the word "commercial" indicated, as Chief Justice Bathurst put it, that the parties contemplated the possibility of some "commercial steps being needed to be taken to enable the condition precedent ... to be effected as distinct from merely making reasonable endeavours to draft documents to give effect to arrangements which had already been agreed on".

In Cypjayne, CAGCare and BHVML had entered into an agreement for the sale of 67 allocated places for aged care under the Aged Care Act 1997. This agreement was conditional upon CAGCare (or a related body of CAGCare) entering into agreements on acceptable terms to acquire the retirement village and aged care facility in which the allocated places were located and the associated business operations.

CAGCare was a special purpose vehicle incorporated for the purposes of the transaction which had no employees or assets. It required financial support from its related companies in the Babcock & Brown Group to enter into any transactions.

The Court found that:

  • both parties knew that CAGCare did not have the capacity to enter into the agreements for the acquisition of the retirement village and aged care facility without the support of its related companies, and that the related companies were under no obligation to provide this support;
  • in that context, CAGCare was obliged to take steps reasonably available to it to put itself in a position where it could enter into the transaction or cause a related corporation to enter into the transaction and negotiate agreements in acceptable form;
  • if these steps did not result in a related corporation being prepared to enter into the agreements or CAGCare being financially able to do so, the reasonable endeavours obligation did not require CAGCare to proceed with the transaction.

In the circumstances, CAGCare was found to have used reasonable commercial endeavours because:

  • it had provided a capital expenditure request to a related corporation, providing detailed information to allow a decision-maker to conclude whether or not the transaction should be entered into and recommending the transaction; and
  • there was little point in further progressing the transaction documents until the related corporation's approval had been obtained.

Therefore, although CAGCare's related body corporate decided not to proceed with the transaction for commercial reasons, CAGCare was found to have used reasonable commercial endeavours to satisfy the condition precedent to enter into the transaction documentation.

Conclusion – what approach should be taken?

The NSW Court of Appeal has again confirmed that it will take the same approach to obligations requiring the use of "best endeavours" and "reasonable endeavours". How these qualifying expressions will be interpreted depends very much on the circumstances of the parties and the transaction.

When inserting an obligation to use "best endeavours" or "reasonable endeavours" in a contract, it is advisable to consider what this actually means to the parties and to list any specific steps that must be taken towards complying with the obligation.

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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.