When you agree to use reasonable endeavours to do something in a contract, do you understand what you are actually required to do? How about if all reasonable endeavours, or even best endeavours are required? What are the practical differences? This Client Alert provides a quick look guide to these types of clauses for traders, commercial teams and in-house lawyers.
Why is an ‘endeavours’ clause used?
An ‘endeavours’ clause is used to downgrade a firm contractual obligations of a party (the Performing Party) to do something, into an obligation only attempt to do something. Meaning that so long as the Performing Party can demonstrate it tried hard enough to comply with the obligation, then there would be no breach of contract if it didn’t succeed.
From a commercial perspective, these clauses are very useful when a specific outcome is desirable but not guaranteed. They are often traded as bargaining chips during negotiations and end up in a lot of contracts.
Examples:
An firm contractual obligation –
the Party shall nominate a delivery day for the product by 18:00 on 2nd July 2017
An ‘endeavours’ clause –
the Party shall use its reasonable endeavours to nominate a delivery day for the product by 18:00 on 2nd July 2017
As common as they are, these clauses shouldn’t be used without proper consideration, especially if you are required to use ‘allreasonable endeavours’ or even ‘bestendeavours’ to perform.
The three classic standards
The important distinction between the three standards is essentially down to what extent a party is required to expend funds to comply, and whose interests and circumstances should be considered when deciding if enough effort has been used.
Reasonable endeavours
Reasonable endeavours clauses are the most commonly used endeavours clauses.
When considering the adequacy of performance, a court will generally review the reasonableness of the actions taken from the perspective of the Performing Party. For example, in an LNG confirmation notice for a DES sale, a common requirement is as follows:
the Seller shall use reasonable endeavours to ensure ship-shore-compatibility by 18:00 on 10th September 2017
The court will expect the Performing Party to have made limited expenditure to try and comply with the obligation (in the example above, to ensure ship-shore compatibility by the deadline agreed) and the court will generally seek to balance the obligation against all relevant commercial considerations – a very subjective test indeed.
Properly drafted reasonable endeavours clauses have been held to be enforceable time and time again (recently reconfirmed in Astor Management AG – see below) and as explained above, they do have some bite!
All reasonable endeavours
Where there is a deadlock in a negotiation between using reasonable endeavours and best endeavours, a common compromise is for the parties to agree to use allreasonable endeavours to perform an obligation. Compliance with this standard is tricky, as it is difficult to distil a set of clear rules on what is necessary from the underlying case law.
What we do know is that the court will consider all relevant facts to the case. It will review the adequacy of the actions taken from both parties. Expenditure is necessary and the Performing Party is expected to have sacrificed some of it sown commercial interests. The standard is therefore higher than reasonable endeavours and falls closer to that of best endeavours.
In practice this hybrid clause should be avoided due to a lack of certainty. It is much more desirable to land on using reasonable or best endeavours which are easier to define.
Best endeavours
Best endeavours clauses should be used with absolutecare.
When examining whether the Performing Party has used its best endeavours to comply with an obligation a court will review the facts from the perspective of the Benefitting Party acting reasonably. The court will expect the Performing Party to have made significant expenditure to try and comply – though not in a way which would jeopardise the solvency of its business.
The Court of Appeal added some colour in IBM United Kingdom Ltd v Rockware Glass Ltd[1980] FSR 335 where it ruled that it expects the Performing party to have taken steps which a “prudent, determined and reasonable party acting in its own interests, desiring to achieve that result would have done.“
This is a high standard to meet and therefore should be used sparingly, if at all, in your contracts. Only agree to it if you know that you will be able to comply or are prepared to invest serious effort and funds to do so. If you have any doubt, then it is prudent to agree to a reasonable endeavours standard instead.
Recent case law
Endeavours clauses have been tired in the courts on many occasions. A recent example is Astor Management AG & Another v Atalaya Mining Plc & Others [2017] EWHC 425 (Comm) in which the Court discussed the three types of classic endeavours clauses and considered whether an obligation to use reasonable endeavours to enter into an agreement with a third party was enforceable.
The Court again confirmed that endeavours clauses are binding, and (contrary to what was being argued in this case) that there is no implied duty of good faith that flows from an endeavours clause unless this is expressly included in the contractual wording.
In relation to the good faith argument, the Court held that:
“A duty to act in good faith, where it exists, is a modest requirement. It does no more than reflect the expectation that a contracting party will act honestly towards the other party and will not conduct itself in a way which is calculated to frustrate the purpose of the contract or which would be regarded as commercially unacceptable by reasonable and honest people. This is a lesser duty than the positive obligation to use all reasonable endeavours to achieve a specified result which the contract in this case imposed.”
Protecting your position
One thing to keep in mind is that under English law, a contractual obligation must be clear, unambiguous and certain in order for a court to enforce it. If the wording of the obligation is too opaque or uncertain, a court may deem it unenforceable. This is a classic problem with endeavours clauses due to their possible vague nature and drafting.
A solution to dealing with all of the problems presented above in relation to endeavours clauses is to define contractually, what reasonable or best endeavours means in the context of that contract. There is some evidence of a move towards this – for example, in LNG Master Sale and Purchase Agreements you often will see a definition of what is a ‘reasonable and prudent operator’.
This solution can be taken a step further by also specifying exactly what practical steps a party should take to fulfil its obligations – addressing directly things such as what expenditure should be made to perform and how long should the Performing Party try to comply. By doing this, the parties know exactly what they need to do under the contract and if properly drafted, uncertainty will be removed.
Conclusion
In practice, a lot of time may be wasted during negotiations seeking to define the precise parameters of an endeavours clause. A better use of this time is to contractually agree exactly what the parties are expected to do in order to comply.
If you have to include an endeavours clause, then think long and hard before agreeing to a best endeavours clause in particular; only agree to it if you are absolutely certain that you can perform.
The information contained in this Client Alert is intended to be a general guide only and not to be comprehensive, nor to provide legal advice. You should not rely on the information contained in this Client Alert as if it were legal or other professional advice.
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