‘Best endeavours’, ‘reasonable endeavours’ and ‘all reasonable endeavours’ are quite often used without any real appreciation of what they mean in law. They are often inserted into contracts by people who do not have a real appreciation of what they mean. The reality is that the common meaning of these terms can be very different from the meanings the courts have given to these terms.
There is a common perception that ‘best endeavours’ conveys a stronger requirement than ‘reasonable endeavours’ and that ‘all reasonable endeavours’ sits somewhere in between. But where does this distinction come from, and what does it mean for parties today?
Best endeavours
The traditional understanding of the term ‘best endeavours’ is based on the UK decision in Sheffield District Railway v Great Central Railway (1911) 27 TLR 451, where the court held that:
‘best endeavours means what the words say; they do not mean second endeavours … the words mean that [the promisor] must, broadly speaking, leave no stone unturned…’.
The Australian position on the meaning of this term was first considered by the High Court in Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83. In that case, Stephen J held that a ‘best endeavours clause’:
‘prescribed 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] viewed in the light of the particular contract.’
In this case, it was held that the provision for Transfield to use its best endeavours towards the design, installation and sales of Arlo’s product in Australia, did not prevent the licensee (Transfield) from selling its own product based on the design of Arlo’s product, even where it would effectively destroy the market in Australia for Arlo’s product. This result would be a surprise to many.
The dominant interpretation of this obligation comes from the High Court’s decision in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41. The HCA held that:
‘…an obligation to use ‘best endeavours’ does not require the person who undertakes the obligation to go beyond the bounds of reason: he is required to do all he reasonably can in the circumstances to achieve the contractual object but no more.’
It is difficult to see how this concept of ‘best endeavours’ is any different from ‘reasonable endeavours’.
This decision has been followed in the Federal Court when the same test was applied in SVI Systems Pty Ltd v Best and Less Pty Ltd [2001] FCA 279.
Chief Justice Gibbs accepted, in Hospital Products v United States Surgical Corp, that an undertaking to use ‘best endeavours’ to promote the sale of one product does not necessarily impose an obligation not to sell a competing product. Again, this is a decision that would surprise many.
The obligation to use ‘best endeavours’ was held in Hawkins v Pender Bros Pty Ltd [1990] 1 Qd R 135 to continue until the promisor should reasonably judge in the circumstances that further efforts would have such remote prospects of success that they are simply likely to be wasted. The promisor is also required to take into account events as they arise (including unexpected and extraordinary ones).
In Western Australia, the nature of a ‘best endeavours’ clause was considered by Paltara Pty Ltd & Anor v Dempster & Ors (1991) 6 WAR 85. The test applied in that case was as follows:
'Whether a party has 'used his best endeavours' to achieve a stated objective, must be determined objectively in the light of what in fact is required to be done, in the circumstances as they exist, to achieve the stated objective. In such a case...he is required to do all that he reasonably can in the circumstances to achieve the contractual objective, but no more.'
This echoes the decision of Hospital Products v United States Surgical Corp and shows that the test from that case is applicable to Western Australia.
The test established by the Full Court in Paltara v Dempster was later followed by Owen J in Jetcity Pty Ltd v Yenald Nominees Pty Ltd (unreported, WA Supreme Court, 9 April 1999).
All of these cases clearly show that in Australia there is little difference between ‘best endeavours’ and ‘reasonable endeavours’.
All reasonable endeavours
The decision by Brereton J in Centennial Coal Company Ltd v Xstrata Coal Pty Ltd [2009] NSWSC 788 further supported the demise in the distinction between ‘best endeavours’ and ‘all reasonable endeavours’.
This case dealt with an obligation for Xstrata to use ‘all reasonable endeavours’ to novate the relevant rights and obligations under a separate arrangement. Justice Brereton reiterated the test applied in Hospital Products v United States Surgical Corp and held that the effect of a ‘best endeavours’ clause depends on the wording and the circumstances of each case. His Honour held that, just because there are currently no more reasonable endeavours to take, it does not mean that all endeavours have been exhausted or that the parties are discharged from their obligations.
The court in Graeme Webb Investments Pty Ltd v Soerpyk Pty Ltd (1993) NSW ConvR 55-661s appeared to treat the terms ‘all reasonable endeavours’ as interchangeable with ‘reasonable endeavours’. Justice Hodgson held that a clause requiring ‘all reasonable endeavours’ to register a plan of subdivision obliged the promisor to pursue an avenue of inquiry foreseeable at the date of the contract.
The UK position on the effect of an ‘all reasonable endeavours’ clause was discussed in UBH (Mechanical Services) Ltd v Standard Life Assurance Co (unreported, The Times, 13 November 1986, CA) as being a middle position: something more than ‘reasonable endeavours’ but something less than ‘best endeavours’. Justice Rougier held that each case will require all those endeavours which obligations merit, balanced against all the commercial reasons not to pursue those endeavours.
In the case of Lambert v HTV Cymru (Wales) Ltd & Anor [1998] All ER D 87, the court held that the agreement was clear in outlining what the parties had to do in order to satisfy their obligation to use ‘all reasonable endeavours’ and therefore it was enforceable.
The High Court of New Zealand held in Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2001] 2NZCR 219 that a term requiring ‘best or all reasonable endeavours’ was enforceable if what had to be done was sufficiently clear and certain to be enforceable.
Reasonable endeavours
In UBH (Mechanical Services) v Standard Life Assurance Co the Court held an obligation to use ‘reasonable endeavours’ to be no more than a requirement for a party to have an ‘honest try’ to perform the relevant obligation. It held that any financial or practical impediments could justify the promisor taking no action at all. If the promisor had done more, it does not mean it had not acted reasonably if it can be established that even if certain action had been taken it would have made no difference at all. The Court held ‘reasonable endeavours’ to be ‘appreciably less than best endeavours’.
It was held in Phillips Petroleum Co UK Ltd v Enron Europe Ltd [1997] CLC 329 that a promisor could refuse to agree for financial or any other reasonable commercial considerations, depending on the nature of the agreement. In that case it was an arms’ length agreement between two international energy companies, involving millions of pounds worth of business over a period of at least 15 years. The Court held that in such circumstances, it was unlikely for there to be an expectation, let alone an obligation, of the parties not to take into account their own financial position and act in the manner most beneficial to them, short of bad faith or breach of an express term of the contract.
The Australian case of Australian Securities Commission v Gallagher (1994) 11 WAR 105 held that the test for whether ‘reasonable endeavours’ have been used is to determine whether the promisor used:
‘… a fair, proper and due degree of care and ability as might be expected from an ordinarily prudent person with the same knowledge and experience as the [promisor], engaging in the [promisor’s] particular conduct or omission and under the particular circumstances.’
There has been little other judicial consideration of ‘reasonable endeavours’ in Australia. As such, this is still the current test for ‘reasonable endeavours’.
The difference
The list of Australian case law suggests that the principle established in Sheffield District Railway v Great Central Railway (1911) 27 TLR 451 is being read down so that the phrase ‘best endeavours’ means all that one can reasonably do within the circumstances surrounding the particular agreement.
It is clear that the distinction between all three terms is much more pronounced in UK cases. The recent UK case of Rhodia International v Huntsmand International [2007] 2Lloyd's Rep 325 suggested that:
‘… there may be a number of reasonable courses of action which could be taken in a given situation to achieve a particular aim. An obligation to use reasonable endeavours to achieve the aim probably only requires a party to take one reasonable course, not all of them, whereas an obligation to use best endeavours probably requires a party to take all the reasonable courses he can.’
This description is markedly similar to the notion of ‘all reasonable endeavours’.
The Australian interpretation, as established by Hospital Products v United States Surgical Corp and Hawkins v Pender Bros, is that the promisor needs to pursue all reasonable courses of action to achieve the contractual object. If such efforts would be pointless, then they will not be reasonable and the promisor will not be obliged to pursue them.
In Australia, the present judicial interpretations of ‘best endeavours’, ‘all reasonable endeavours’ and ‘reasonable endeavours’ in a commercial context appear to be indistinguishable.
Application to contract negotiations
Given the uncertain meaning of these terms and the reading down of the plain English meaning of these terms by the Australian courts, it is in our view a dangerous practice to simply insert these terms into contracts.
We suggest that, in each case, the contract clearly set out what is expected of the party the subject of the relevant obligation. This would include things such as incurring specific kinds of expenses, incurring expenditure beyond a specific dollar limit, disposal of assets, actions that would jeopardise the promisor’s solvency, anything which diverts the promisor’s employees from their usual tasks, or taking legal or administrative action.
Equally, parties could specify the actions that the promisor is obliged to take or not take in a given set of circumstances.
A further option to consider is to impose a defined ‘good faith’ effort standard. That is, a standard of effort built around behaving in a certain way rather than taking certain actions.
Such a definition could use notions of: acting reasonably and honestly; assessing actions undertaken on an objective basis rather than a subjective one; exercising a degree of caution and diligence expected of an honest person of reasonable prudence; not wilfully shutting one’s eyes or deliberately refraining from making enquiries; not acting with an alternative motive; or having regard to the legitimate business interests of both parties.
Negotiating and drafting contracts in such a way would also avoid the risk of creating obligations that are construed as never-ending by the courts (as in Centennial Coal Company v Xstrata Coal). Parties could also consider inserting clauses in their agreements that include appropriate time limits or ‘sunset clauses’ on the obligation and provide that the time limit is not affected by any changes in circumstances that may make the achievement of the contractual object reasonably practicable in the future.
These cases highlight the importance of clearly defining the parameters of the obligations owed under a contract to avoid uncertainty, making the time spent negotiating the contract worthwhile, and lowering the risk of disputes as to the meaning of the agreement. The terms ‘best endeavours’, ‘reasonable endeavours’ and ‘all reasonable endeavours’ are often not helpful.
For more information, please contact:
Peter Beekink Tamara Heng
Partner Senior Associate
(08) 9288 6751 (08) 9288 6869
peter.beekink@lavanlegal.com.au tamara.heng@lavanlegal.com.au
