A breakdown of obligation burdens
All contracts, regardless of their subject matter, impose obligations on a party to do or omit to do certain things.
When negotiating a contract, the parties will consider whether such obligations should be absolute requirements, or otherwise what degree of effort should be expended to fulfil their respective obligations. In this context there are some phrases which are commonly used to describe the required effort and in this article we will consider the common law interpretation of these phrases.
There are a number of scenarios where absolute obligations are considered unreasonable and parties often seek to water these down through a variety of qualifications (for example a party might only commit to try to complete their obligations rather than agree to do so absolutely). Frequent qualifications include using:
- reasonable endeavours (least onerous)
- all reasonable endeavours
- best endeavours (most onerous)
to fulfil an obligation.
Use of these terms is popular in circumstances where a party cannot guarantee compliance (for example, if fulfilling part or all of an obligation is not strictly within its control) or it is difficult to foresee exactly what actions will be required at the time of entering into the contract. Failing to satisfy an obligation will give rise to a breach of contract and therefore the more flexibility which is built into an arrangement, the smaller the probability that the obligor will breach the contract.
Whilst use of these terms is common, confusion often arises due to the differences between their literal English and legal meanings. 'Endeavours' qualifications are interpreted by reference to the normal rules of contractual interpretation, namely by:
- Assessing the qualification at the time the contract is formed
- The other provisions of the agreement
- The intended purpose of the agreement between the parties
- Its commercial context
Whilst the contract will be interpreted at the time the contract is formed; whether an obligation has been satisfied will be determined at the time of performance. For example, if an obligation is continuing, then it is likely what is required to satisfy this obligation will change over time, and therefore satisfaction will likely change over time too.
Care should be given when using these qualifications as the smallest difference can have disproportionate consequences. We have briefly analysed use of each qualification in turn below.
Case law suggests that 'reasonable endeavours' only requires an obligor to take one commercially reasonable course of action in order to satisfy its contractual obligation (obiter, Rhodia v Huntsman ). The case of Minerva v Greenland Ram sets an objective test, namely: "what would a reasonable and prudent person acting properly in their own commercial interest and applying their minds to their contractual obligation have done to try" to complete their obligation.
'Reasonable endeavours' are therefore considered to be a balance between a party's commercial interests and the obligation itself. Parties often further qualify 'reasonable endeavours' by stating that parties should use 'commercially reasonable endeavours', however, there is no case law to suggest that this imposes any different obligation to simply 'reasonable endeavours'.
This is the best form of qualification for the party agreeing to discharge the obligation, providing some flexibility in its compliance, however, the party benefiting from the obligation should seek stricter qualifications or an absolute obligation if they want a more robust contractual right.
All reasonable endeavours
Depending on the context, 'all reasonable endeavours' is considered a middle ground between 'reasonable' and 'best endeavours' which reflects an ordinary reading of the words, however, this is not always the case. In Rhodia v Huntsman , the judge stated that "it may well be that an obligation to use all reasonable endeavours equates with using best endeavours"; highlighting that best endeavours requires a party to exhaust all reasonable courses it can to comply.
There is therefore some doubt over use of 'all reasonable endeavours', and the contrary interpretation is that 'all reasonable endeavours' does not oblige a party to act contrary to self-interest (for example, its commercial interests), whereas best endeavours might. Therefore the steps which a party takes to comply with its obligation will depend on the circumstances which may or may not include all reasonable courses of action and to act contrary to its own commercial interests.
The uncertainty surrounding the interpretation of 'all reasonable endeavours' means that if an alternative qualification can be agreed, then it may be preferable to do that to avoid raising more questions than answers.
The most onerous form of qualification, 'best endeavours' requires a party to take all steps within their power to comply with their obligations, including if such actions should be contrary to its commercial interests. This qualification is considered only second best to an absolute obligation but is subject to reasonableness.
The best example of its use is in the case of Jet2.com v Blackpool Airports where an airport operator had to operate outside of normal opening hours in order to promote low-cost services by a budget airline, even if it meant the airport was making a loss. This was because the airport operator had agreed to use 'best endeavours' to promote Jet2.com's low-cost services in the contract. Similarly to commercially reasonable endeavours, currently, the use of synonyms such as 'utmost endeavours' have no legal distinction to 'best endeavours' and therefore parties being asked to do something need to be careful when accepting language of a similar nature.
The party benefiting from a "best endeavours" obligation should gain comfort in accepting this qualification in a negotiation, as the next best requirement to an absolute obligation.
Use of these terms is a well trodden path and, whilst simple, their correct application can be effective in all contract negotiations, irrespective of sector. Attention should be paid to the wording proposed though when watering down strict obligations to an 'endeavours' based obligation, so as not to concede certainty too readily.