INSIGHTS: Endeavours to resolve the debate

June 10, 2014

Negotiating a contract? Can’t commit to an absolute obligation? Looking to impose an endeavours-type obligation (to use reasonable endeavours or best endeavours) to fulfil an objective? Then prepare well and minimise the debate.

Reasonable endeavours and best endeavours

A common obligation applied in commercial contracts is the use of an “endeavours” clause – the requirement to use “best endeavours” or “reasonable endeavours” where the obligation is not an absolute obligation.

In utilising an endeavours-type clause, it is prudent to detail the relevant criteria by which the endeavours will be assessed or set out specific actions or steps that the party must take.

Commonly, contractual negotiations on the terms of a contract can involve much discussion between the parties on whether a particular party’s obligation should require the party to use “best endeavours” or “reasonable endeavours” or another similar phrase.

There is an incorrect perception that an obligation to use “best endeavours” imposes a significantly strong standard of conduct on a party to do all that it can to fulfil the obligation (without being absolutely obliged to fulfil it), while “reasonable endeavours” imposes a less burdensome requirement.

In Australia, the courts have not identified any real difference between the two phrases. Each of these phrases lead to a similar standard of conduct and reasonableness. The meaning of “reasonable endeavours” and “best endeavours” will be construed from the terms of the relevant contract and what is reasonable in the circumstances.

Recent guidance – reasonable endeavours

A recent High Court of Australia decision has provided some general guidance on the interpretation of obligations to use reasonable endeavours to achieve an objective.
The High Court considered a “reasonable endeavours” obligation in the case of a long-term gas supply agreement between various gas suppliers (the sellers) and a purchaser of gas (Electricity Generation Corporation trading as Verve Energy v Woodside Energy Ltd & ors [2014] HCA 7).

Briefly:

  • The agreement required the sellers to make available a base quantity of gas and to use reasonable endeavours to provide a supplementary quantity of gas.
  • An explosion at a gas plant temporarily reduced the supply of gas, although the sellers’ ability to supply gas was not affected.
  • Due to the reduction in gas supply, the market price of gas significantly increased.
  • Under the agreement, the sellers were able to take into account all “relevant commercial, economic and operational matters” in considering whether they were able to supply the supplementary quantity of gas. This was the key element in the Court’s decision.
  • The sellers considered that they were not able to supply the supplementary amount of gas at the price set in the agreement.
  • Rather, the sellers offered to supply the same quantity of supplementary gas at market price, which was higher than the price in the agreement.
  • The High Court held that there was no breach of the reasonable endeavours obligation.

The High Court held that the agreement did not oblige the sellers to supply the supplementary gas in conflict with their own commercial interests. The sellers were entitled to take into account all relevant commercial, economic and operational matters in deciding whether to supply the gas.

A key issue was the relationship between the sellers’ obligation to use reasonable endeavours to make available the gas and the sellers’ rights to take into account all relevant commercial, economic and operational matters in considering whether they were able to supply the gas.

Here, the parties had set their own standards for determining “reasonable endeavours” by allowing the sellers to consider all relevant commercial, economic and operational matters in determining whether they were able to supply the gas.

The High Court made a number of general observations on the use of “reasonable endeavours”:

  • The obligation is not absolute or unconditional.
  • The nature and extent of such an obligation is necessarily conditioned by what is reasonable in the circumstances, including circumstances that may affect a party’s business.
  • Some contracts include their own standards of reasonableness, by express reference relevant to the party’s business interests.

The decision did not address or provide any certainty as to whether “best endeavours” and “reasonable endeavours” impose substantially similar obligations.

Lessons learned

Essentially, contracting parties can (and should) define and set the standards for determining the scope of a conditional obligation in an endeavours-type provision.
An objective approach is adopted when considering and determining the rights and obligations of parties under a contract.

The words “reasonable in the circumstances” are some of the most frustrating in all of the law. While their use is often entirely justified, they make it so much harder to identify any bright line between what is acceptable and what is not.

Steps to take

Before inserting an endeavours-type obligation in a contract:

  1. Clarify that the obligation is not absolute.
    If the obligation is critical to the contract, an absolute obligation should be included instead. The interests of the party to whom the obligation is owed is then protected in terms of contractual certainty of performance.
  2. If the party to perform the obligation may be excused from performance or full performance in certain cases (such as for matters beyond its control), set out the steps required or criteria to satisfy its obligation in clear and practical terms. It will help minimise problems later.
  3. The criteria by which performance of an obligation may be assessed include:
    • specific steps the party is required to take with agreed timelines, e.g. prepare and submit an accurate and complete application seeking approval from an authority within 28 days of the contract date
    • whether the party must bear the costs of any steps and if so, an amount or maximum $ spend, e.g. the party must pay the application fees and the technical consultants’ costs of up to $X including GST
    • specific steps the party is not required to take, e.g. divert critical business resources longer than a specified time period; sue another party
    • whether the party must deal with any unexpected issues, delays or expenses along the way
    • sunset dates
  4. If the party to perform the obligation will have discretion as to whether it will perform the obligation, then the contract should clearly reflect that.
  5. Review your contract generally, keeping in mind the potential impact that other terms of the contract may have on the endeavours-based obligation.

 

Meridian Lawyers can assist you to prepare a contract in clear and concise terms. For more information please contact Suzie Losanno.