Best endeavours and reasonable endeavours in commercial contracts

Introduction

The words best endeavours and reasonable endeavours are phrases, which are commonly used in commercial contracts. A variety of phrases are used in practice such as best endeavours, all reasonable endeavours, reasonable endeavours, best efforts and reasonable efforts.

This paper is concentrated on the terminology using "endeavours" which is the more common word found in English Law agreements. This is in contrast to US law where best efforts and reasonable efforts are the phrases, which are commonly used. The term "best efforts" is used in the Uniform Commercial Code.

In this paper, I have 2 aims. To provide guidance on what the terminology means in different contexts and some practical considerations to be considered when negotiating agreements.

Is context important?

Before attempting to determine what the terminology means it is important to consider in what context the words are used. The phrase is seen in a number of contexts.

Sales obligations: Distribution, agency and technology transfer agreements (licensing arrangements) often include provisions for the agent or the licensee to use best endeavours to market and sell a product.

Supply obligations: The terminology may be used in relation to supply obligations in goods and services agreements, for example a requirement to use reasonable endeavours to deliver a good by a certain date; to use reasonable endeavours to ensure a website is available to users 24/7; to use reasonable endeavours to ensure that a hosted system is free of viruses.

Third party consent obligations: The terminology may be used to obtain a third party’s consent; for example a third party’s consent to the assignment of a contract, for the obtaining of governmental consents, for example planning permission or an export licence.

Agreement obligations: The terminology has been used with the intention of imposing an obligation to agree a term or terms of a contract.

Shareholders’ consent: The phrase may be used in circumstances in the context of a corporate acquisition where the directors are required to use their best/reasonable endeavours to obtain shareholder approval to a corporate acquisition.

In addition to the contexts specified above, I consider it is important that one remains focussed on the two main questions – what steps is a party required to undertake and how much money is a party required to incur in fulfilling its best/reasonable obligations. These questions should remain in the forefront when reviewing the authorities.

Health warning

The majority of judicial authority and texts on the subjects are at pains to emphasis the fact that it is difficult to give a precise meaning to the terminology. The actual interpretation of the phrase is such that "each contract must be interpreted according to its own terms and according to its nature and purpose."

Sales Obligations

Best endeavours

In Sheffield District Railway Company v Great Central Railway Company (1911) 27 TLR, the court was asked to rule whether a company had used its best endeavours to develop the through and local traffic of the Sheffield District Railway. The court stated that that phrase best endeavours did not mean that Great Central was required to give a specific proportion of its trade to the Sheffield District nor was it required to conduct its business as to offend its traders and drive them to competing routes nor was it required to overstep the limits of reason. However, short of these qualifications the Great Central had to "leave no stone unturned" to develop traffic. Two principles can be taken from this authority. It appears that the company subject to the obligation can sell a competing service at the same time, if it was selling a competing service prior to taking on its obligation. Second, the phrase "leave no stone unturned" indicates that the obligation is onerous. The court in this instance concluded that it was not satisfied Great Central had used its best endeavours because, inter alia, it was not satisfied that the instructions given to the canvassers or invoicing clerks of the Great Central were adequate, or that the information contained in relevant publications was full and definite as it should be.

Terrell v Mabie Todd & Coy Ltd (1952) TLR 574 concerned a licence of a patent for fountain pens and ink bottles, with a requirement on the exploiting entity to make their best endeavours to promote the sale of as many fountain pens as [reasonably] possible. It was held that the obligation would not require the directors to carry on the manufacture and attempted sale to the certain ruin of the company, but before that extreme position could be reached there would arise questions as to the amount of money to be expended on the production and on advertisement. The exploiting entity was required to do what they could reasonably do in the circumstances and the standard of reasonableness was that of a reasonable and prudent board acting properly in the interests of their company and applying their minds to their contractual obligations to exploit the inventions. The obligation therefore requires a party to incur costs in performing its obligations, but can take into consideration its own financial situation. Therefore arguably a company with greater resources would have to do more than one with less. The reference to doing what is reasonable is important to note; one could expect to see such a reference in a discussion on the phrase reasonable endeavours. The application of the judgement in this area to the facts did not arise, because the defendant company had simply stopped selling the relevant product. The judgement appears sensible. If the licensor was exploiting the product itself, so that it was concerned with the costs as well as the revenues it would take into consideration the costs involved in sales and marketing and would balance that against estimated return. Please also note that there was no suggestion that the exploiting party was not entitled to sell competing products.

The third judgement that I wish to discuss is an Australian authority, Transfield v Arlo International (1980) 144 CLR 83. This authority concerned a patent license for the manufacture and sale of steel poles used in electricity pylons. The licensee had agreed to use its best endeavours in and towards the design fabrication installation and selling of the pole. In this instance, the licensee when faced with doubts expressed by a potential customer over the suitability of the pole, did not press the suitability of it for the purpose but offered its own competing product. The court held that the licensee had not used it best endeavours to exploit the pole. Interestingly, the court stated that the obligation was to be measured by what was reasonable in the circumstances, and I emphasis the usage of the word reasonable. While there was some difference in opinion, as with the other two authorities I have referred to the judges stated that the promotion of a competing product was not prohibited. This principle is in my view logical.

In R. Davis Limited v Tooth & Company Ltd (1937) 4 AU E.12.118 there was not an express obligation to use best endeavours in the agents’ contract for the sale of whisky, but words "to devote the principal part of their energies…to pushing the sale". The Privy Council held that this meant to do the best it could to sell as much as could be sold. There appears to be the suggestion that what is practicable is judged subjectively by reference to the particular entity undertaking the obligation.

Reasonable endeavours

There are two main authorities relating to sales obligations on the meaning of reasonable endeavours. The first is UBH (Mechanical Services) Limited v Standard Life Assurance Company (The Times 13.11.86). This authority concerned an obligation on a landlord to use its reasonable endeavours to sell heating supplied by a third party. Difficulties arose because the heating was powered by oil and was considerably more expensive than other providers. The court at first instance held that an obligation to use reasonable endeavours was appreciably less than an obligation to use best endeavours and also expressed the view that all reasonable endeavours is probably a middle position between the other two. The landlord had to exercise a balancing act between its contractual obligations to UBH and all relevant commercial considerations including its relationship with the tenants, its reputation, ease with which new tenants might be procured and the cost and uncertainties of litigation. In relation to any proposed course of action, the chances of achieving the desired result would also be of prime importance. The judgement again seems sensible; a party can take into account other considerations. On the facts the landlord had gone to some lengths in trying to persuade new and existing tenants to take the heating, but was faced with tenants setting up their own heating systems and if it had brought legal proceedings was likely to be faced with counterclaims that it had been in breach of its obligations as the landlord.

In the House of Lords decision on P & O Property Holdings Limited & Others v Norwich Union Life Insurance Society [1994] New Property Cases 20, P & O the developer was subject to a reasonable endeavours obligation to obtain lettings of a shopping centre. Norwich Union was entitled to a percentage of revenues, and argued that P&O should have offered reverse premiums to attract tenants if that was part of good estate management. The case involved a request for a declaratory judgement. The House of Lords (as the Court of Appeal) were reluctant to use the concept of what a hypothetical reasonable landlord would have done in the circumstances. The court concluded that on the wording while the developer was under an obligation to use reasonable endeavours to obtain lettings, there was no a separate obligation to use reasonable endeavours to agree the terms of the lettings. Second, the objective test of reasonableness of the terms was not included and could only be introduced by a process of implication. The court also considered that an arbitrator would be faced with an impossible task of determining whether a reverse premium was reasonable because it depended upon the circumstances and wishes of the landlord. The decision is not without problems. If a party is under an obligation to use reasonable endeavours to sell a product or service one would expect that he would have to act reasonably when determining the terms of the sale. If he was unreasonable he might not sell anything.

Supply Obligations

Best endeavours

Unfortunately there are not many decisions providing guidance on the meaning of best/reasonable endeavours in the context of supply obligations. The leading authority in this area is Midland Reclamation Ltd & Leicestershire County Council v Warren Energy Ltd (Unreported 20/1/97). This was a complicated case concerning the supply of methane gas from a tip to a power company for the generation of electricity. There were difficulties in the arrangement as, among other things it was argued that the Council were not supplying the gas at sufficient pressure and should have incurred cost to improve the delivery. The Council was subject to an obligation to use its best endeavours to maintain, develop and operate at its own cost gas extraction and pumping systems at a quarry to ensure extraction of the optimum volumes and quantities of the gas. The court rejected that a "best endeavours" obligation was the next best thing to an absolute obligation or a guarantee. As with other authorities, the court referred to doing what can reasonably be done in the circumstances and the standard of reasonableness is that of a reasonable and prudent board of directors acting properly in the interests of the company. One needs to ask the question in relation to the situation and knowledge at any given time and that in a long agreement of 15 years there could be progress as knowledge and skill improved. On the facts the court concluded that the Council had not failed to use its best endeavours. The judgement is consistent with other authority in relation to its reference to reasonableness. It is difficult to distil from the application of the legal interpretation to the facts any useful principle. It appears on the facts the gas pressure may have been able to have been raised by the actions of the generating company as well as the Council and the Council was not subject to an express obligation (whether qualified by best endeavours or otherwise) to maintain a certain pressure. The court therefore concluded that as a matter of legal interpretation it was for the generating company (not the Council) to improve the pressure. The court expressly stated that expert opinion as to which party could improve the situation was irrelevant. However, when one is considering a supply obligation where both the supplier and the customer could remedy a deficiency (as opposed to it being solely remediable by the supplier) it may be hard to demand that the supplier remedies the situation.

A further authority is Pips (Leisure Productions) Ltd v Walton [1980]. The use of the phrase "best endeavours" was not used in the true sense of a supply obligation, but in relation to a best endeavours obligation to complete a property transaction by a certain date. The court concluded that best endeavours was something less than efforts which go beyond the bounds of reason, but are considerably more than casual and intermittent activities. There must at least be doing of all that reasonable persons reasonably could do in the circumstances. On the facts one of the parties had done nothing for two weeks.

Third Party Consents

Best endeavours

There are a number of interesting judgements on the use of best/reasonable endeavours to obtain third party consents. IBM United Kingdom Ltd v Rockware Glass (1980) FSR 335 concerned a best endeavours obligation on IBM to obtain planning permission. The application to the local authority failed and the question then arose whether IBM was required to incur further cost in appealing to the secretary of state. The Court of Appeal stated that the best endeavours obligation required IBM to do all it could reasonably do to ensure that the planning permission was granted and if the application was refused and an appeal had a reasonable change of success, IBM was required to make an appeal. The Court stated further that IBM was bound to take all those steps in their power which are capable of producing the desired results, being steps which a prudent and reasonable owner acting in his own interests and desiring to achieve that result would take. This judgement is interesting for a number of reasons. Again there is a reference to doing what is reasonable; the obligation does require a party to spend time and money achieving a result.

Reasonable endeavours

Agroexport v Cie Europeene [1974] Lloyd’s Law Reports concerned the export of maize from Romania and an implied term to use all reasonable endeavours to apply for an export licence. The court referred to the need to use diligence and take all reasonable steps and to ask whether the obligor had done what was reasonable; confusingly the court also used the expression best endeavours to describe the obligation. The obligor had not satisfied its obligations because it was late in making an application and only made a second application after they had informed the purchaser that they were no longer intending to supply the maize. Elwood v Ravenscroft Properties Ltd (OL1) 1991 SCT A4 is a Scottish authority on an obligation to use every reasonable endeavour to secure landlord’s consent to a tenant’s assignment of a lease. The question arose where the landlord refused consent, should the assignor be required to commence litigation. The court concluded that the assignor was required to take every step in their power to put the necessary information before the landlord which would be favourable. The assignor was not, however, under a necessity to commence litigation if the landlord refused but indicated that the phrase allowed reasonable discretion about the conduct of litigation, and could follow counsel’s advice on the merits of legal action.

Principles to be taken from these authorities

So what are the underlying principles that can be taken from these authorities. First, best/reasonable endeavours is not an absolute obligation. Second, there is authority which states that reasonable endeavours is less than best endeavours with all reasonable endeavours in the middle, and I believe it is right to say there is a sliding scale in the extent of a party’s obligation. Third, while the Sheffield Railway authority seems to indicate that best endeavours is an onerous obligation "not to leave a stone unturned", the other authorities consistently refer to doing that which is reasonable. Fourthly, on the basis that doing what is reasonable would suggest that the difference between best and reasonable endeavours is not so significant. Fifthly, in looking at what is required the likelihood of the desired outcome is of relevance. Sixthly, the party subject to the obligation can take into consideration its own interests, but that appears to me to be part and parcel of the relevance of doing that which is reasonable. Seventhly, the obligor may be required to incur some cost provided it is reasonable to do so. I believe the cost issue has to be considered in the light of the obligation. In a sales context, one would expect the exploiting party to have to incur some marketing or sales costs; similarly if an obligation involves a supply or consent, time and effort is required. Eightly, the use of the phrase inevitably creates some uncertainty, but that is often why they are used; the parties cannot agree on an absolute obligation and one of the parties wants some flexibility to the obligation.

Drafting considerations

There are a number of drafting techniques that can be used to deal with the uncertainty of the best/reasonable endeavours obligation. Leaving aside the obvious solution of making the obligation absolute, one is by specifying in the contract in detail what the performing party is required to do; the other is by using financial incentives to incentivise the performing party.

In sales contracts one can specify what sales and marketing activities one wants the exploiting party to undertake, and one can include sales/marketing expenditure requirements. An express provision can be included as to whether a party can sell competing products or services. Financial incentives can be included to encourage sales. For example, one often sees a minimum fee which guarantees the licensee some return. One can include a decreasing royalty rate for higher sales to encourage higher levels of sales.

With supply obligations one could provide greater detail to the supply obligations. For example in Midland Land Reclamation there could have been an express provision on the pressure required in the supply of the gas. Even if the specific obligation is used in conjunction with best/reasonable endeavours obligation, inevitably the more specific one is the harder it will be for the performing party to claim it does not form part of its obligations or where there is a failing it is not responsible. One could also not use the terminology and instead have a service level structure with service level credits. In this way the performing party will have a financial incentive to perform to a high standard and can factor in the cost of the service credit against the cost of achieving the highest standard. It is not appropriate to use the best/reasonable endeavours terminology when specifying an obligation to meet service levels, as certainty is required when determining whether service level credits are payable.

With regard to obtaining third party consents, one could clarify whether appeals should be undertaken or litigation commenced, although the parties would have to caveat that obligation with the words where it is reasonable to do so. This would create the presumption at least that where appropriate the obligor is required to do so.

It is probably worthwhile discussing in this arena whether it is beneficial to include a generic definition in a contract of what is meant by best/reasonable endeavours. My view is that such an exercise is probably not that helpful; it would probably include the words doing what is reasonable in the circumstances or equivalent. Some commentators suggest that the use of the word reasonable endeavours does not create an obligation on the performing party to incur any cost. I do not think this is borne out in the authorities but one could include a statement clarifying whether cost is to be incurred in achieving a particular aim.

There are two further related issues worth considering in a supply context. The authorities are clear that there is a subjective element in using best or reasonable endeavours as the performing party can take into consideration its own interests. A drafting technique that could be used in certain instances to avoid this and introduce a greater degree of objectivity but at the same time to avoid a party having to guarantee an outcome is by requiring the obligor to perform an obligation in accordance with reasonable skill and care or good or best industry practice while at the same time not specifying that a definitive outcome is necessary. For example, in an IT outsourcing arrangement rather than specifying that there will be no unauthorised access to an IT system, one could specify that the contractor will use and employ software and techniques in accordance with good industry practice to prevent unauthorised access.

Related to this issue is whether an objective test of skill and care forms party of a requirement to use best or reasonable endeavours in supply obligations. There may be an argument that it is not of relevance; it is related to what the performing party itself can do, and if the performing party is inherently not good at performing its obligations it may still be using its best or reasonable endeavours because it is trying. In Midland Reclamation the court referred to the fact that knowledge and skill may improve over the length of the contract. However, some of the authorities, however, refer to what a reasonable and prudent board of directors would do, which brings in some element of objectivity, and in practice a party may have difficulty in showing it has used its best or reasonable endeavours if it has performed its obligations in a way which may be described as negligent. However, again this issue could be avoided by using similar wording to that proposed in the previous paragraph.

Other cntexts

Before concluding this paper, there are two other contexts in which the phrase best/reasonable endeavours arises.

Best/reasonable endeavours to agree

The courts have opined on the use of the terminology in clauses which require the parties to agree something, similar to an obligation which requires parties to negotiate in good faith. The courts have found such clauses unenforceable for lack of certainty. This is set out in a number of authorities but the leading authorities are the court of appeal decision in Phillips Petroleum Co UK Ltd & Others v Enron [1997] CCH 329 and Walford v Miles [1992] AC 128. The unenforceability of such provisions are due to the "agreement to agree" aspect of the obligation as opposed to the use of reasonable and best endeavours per se. What is however enforceable, is an obligation to use best or reasonable endeavours to negotiate a right in a third party agreement (Lambert v HTV Cymru (Wales) Ltd 1998 The Times 17 March). In the latter what was required was a serious rather than a derisory attempt.

Obtaining consents of shareholders The final context is the use of the terminology in the context of directors’ obligation to obtain shareholders consent in corporate acquisitions. Unsurprisingly, the courts have said in this instance that the obligation whether best or reasonable cannot oblige the directors to act contrary to shareholders’ interests, say if a better offer is made by a third party or the acquisition is otherwise no longer in the shareholders’ interests. Rackham v Peek Foods Ltd (1990) BCLC concerned the phrase best endeavours in such a context, John Crowther Group PLC v Carpets International PLC [1990] BCLC 460 concerned the use of reasonable endeavours in such a context. A director owed fiduciary duties to the company and was required to act in the best interest of the company.