Reasonable endeavours – a higher standard than you might think

Reasonable endeavours clauses are often inserted into commercial contracts by parties to qualify their obligations under the contract in some way.

A party may agree to “try” to achieve something by undertaking to use ‘reasonable endeavours’ to achieve a particular contractual object.

Often, the parties do not understand what is required in order to meet the obligation of using reasonable endeavours.

Consequently, parties may not fully appreciate that reasonable endeavours imposes a significant obligation and a high standard of “trying” to achieve the contractual object.

Reasonable endeavours clauses can take different forms with different terms or phrases being used over the years. In addition to ‘reasonable endeavours’, the terms ‘all reasonable endeavours’ or ‘best endeavours’ commonly arise.

The position in Australia is that there is little difference between these terms in meaning and in the standard which is required in order to satisfy an obligation to use ‘reasonable endeavours’ or ‘all reasonable endeavours’ or ‘best endeavours’.

Comparatively, the distinction between these terms is more pronounced in the United Kingdom where the terms appear to fall on a scale, with an “all reasonable endeavours” clause being the middle position, something more than ‘reasonable endeavours’ but something less than ‘best endeavours’.

Origin of the terms

The traditional understanding of the term ‘best endeavours’ comes from the UK case of 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…

Australian interpretation

The meaning of the term ‘best endeavours’ was first considered by the High Court of Australia Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83. Stephen J held that a ‘best endeavours’ clause:

prescribed a standard of endeavor 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.

The High Court of Australia again considered the obligation of “best endeavours” in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41. It was 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 that he reasonably can in the circumstances to achieve the contractual object but no more.

The decision in the Hospital Products case has become the dominant interpretation of the term ‘best endeavours’ and the same test was followed by the Federal Court in SVI Systems Pty Ltd v Best & Less Pty Ltd [2001] FCA 279, and by the Supreme Court of WA in Paltara Pty Ltd & Anor v Dempster & Ors (1991) 6 WAR 85 which applied the test that:

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.

A high standard: “All that is reasonable”

Regardless of which phrase is used, the parties must do all that is reasonable in the circumstances to satisfy the obligation, having regard to the circumstances surrounding the contract, including the nature of the contract and the capacity, qualification and responsibilities of the parties.¹

The court in Centennial Coal Company Ltd v Xstrata Coal Pty Ltd [2009] NSWSC 788 held that the effect of a best endeavours clause depends on the wording and circumstances of each case.

The content of a best endeavours or reasonable endeavours clause is influenced by its contractual and factual contexts² which makes this high standard all the more difficult to satisfy, as what is required is to be assessed by the court using an objective test.

An agreement to use ‘all reasonable endeavours’ to effect a contractual object could potentially impose a never ending obligation on parties. In the Centennial case, Brereton J found the relevant party was not in breach of the obligation but that it also had not discharged it. In Brereton J’s view:

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.
Even if all avenues of endeavor are exhausted at the present time, the obligation may still exist if achievement of the contractual object becomes reasonably practicable in the future.

Whilst “all that is reasonable in the circumstances” is a high standard, the parties are not required to go “beyond the bounds of reason”, nor are they obliged to act against their own commercial interests.³

The obligation to use reasonable endeavours may also be set by a standard of what is reasonable within the terms of the contract.⁴

Recent guidance

The High Court recently provided guidance on the meaning and scope of “reasonable endeavours” in Electricity Generation Corp v Woodside Energy Ltd (2014) 306 ALR 25; [2014] HCA 7 and reiterated the importance of drafting commercial contracts to ensure that such obligations are clearly defined.

No distinction was drawn between reasonable endeavours and best endeavours in the discussion of the clause in that case, and the High Court did not object to the parties making submissions and proceeding on the basis that reasonable endeavours and best endeavours are substantially similar obligations.⁵

The High Court made three key observations about the construction of reasonable endeavours clauses:⁶

• An obligation expressed as an obligation to use ‘reasonable endeavours’ to achieve a contractual object is not an absolute or unconditional obligation.
• The nature and extent of any obligation to use ‘reasonable endeavours’ is necessarily conditioned by what is reasonable in the circumstances, and this can include circumstances which may affect the business of the party tasked with the obligation.
• Some contracts containing an obligation to use or make ‘reasonable endeavours’ to achieve a contractual object may contain their own internal standard of what is reasonable, by express reference to the business interests of the party tasked with the obligation.

In the Woodside case:

• The seller’s obligation to use “reasonable endeavours” to supply supplementary gas was qualified by a paragraph which entitled the parties to take into account all relevant commercial, economic and operational matters pursuant to the contract.
• This qualification provided an internal standard of reasonableness by which the obligation to use reasonable endeavours could be measured.
• The agreement was commercial in nature, which meant that the parties were entitled to pursue their own interests, having regard to their capacity to supply as well as their business interests.
• Therefore, the sellers were not obliged to supply supplementary gas in circumstances where there was conflict with the sellers’ own business interests.  Nor were the sellers expected to use reasonable endeavours for the common benefit of both parties.

The importance of clear drafting

What constitutes “all that is reasonable in the circumstances” but no more than the “bounds of reason” is ambiguous.

Parties cannot know with certainty what a court would objectively consider is required of them to satisfy a reasonable endeavours clause.

Therefore, setting an internal standard of what constitutes ‘reasonable endeavours’ (or ‘all reasonable endeavours’ or ‘best endeavours, whichever term is chosen) may be the best way for contracting parties to ensure there is no uncertainty as to whether such an obligation has been discharged.

We suggest, particularly following the decision in the Woodside case, that contracts:

• clearly define what is required to be done to meet an obligation to use ‘reasonable endeavours’, ‘best endeavours’ or ‘all reasonable endeavours’ (which may include a cap on the cost to be incurred in order to meet the obligation); and
• contain appropriate time limits or sunset clauses to confine such an obligation to avoid ‘reasonable endeavours’ obligations that could potentially continue indefinitely.