The Nuances of Endeavours Clauses

LEGAL BRIEFING FROM THE COMMERCIAL DISPUTE RESOLUTION GROUP

29 JULY 2010

Contracts rarely spell out in an exhaustive list the steps a party has to take to comply with all its obligations; it would lead to extremely cumbersome unworkable documents. Equally unworkable are agreements which impose absolute obligations on the parties to achieve certain objectives or results. That situation would lead to prima facie breaches of contract however hard the parties had tried or impossible the objective had become to achieve. Instead, parties often seek to qualify a contractual undertaking by agreeing the extent of effort or 'endeavours' the obligor must use to achieve the objective.

This briefing looks at recent case law on the proper construction and meaning of these terms and provides practical advice on how to minimise uncertainties that may arise with their use.

CONSTRUCTION OF ENDEAVOURS CLAUSES

The meaning of an endeavours clause is construed at the time the contract is formed, taking into account its terms; other provisions of the contract, and its commercial context.

Whether or not the clause has been satisfied, however, is determined by reference to the facts at the time of performance and so factors unforeseen at the time the agreement was made (e.g. workforce strikes, sudden market fluctuations) are all relevant in deciding if the obligor made sufficient effort to achieve its obligations.

There are various endeavours clauses; the ones which this briefing focuses on are:

• best endeavours
• reasonable endeavours
• all reasonable endeavours
• all reasonable but commercially prudent endeavours.

Are they all varying ‘strengths’ of endeavours or are some in effect different terminologies for the same thing?

BEST ENDEAVOURS

Obligors required to use their best endeavours must, “take all those steps in their power which are capable of producing the desired results… being steps which a prudent, determined and reasonable obligee, acting in his own interests and desiring to achieve that result, would take” (emphasis added).[1]

It is not an absolute obligation (otherwise there would be no point for the phrase to embellish the underlying obligation) and it does require a consideration of reasonableness; the obligor must do all that reasonable persons would reasonably do in the circumstances.

For example, best endeavours may require the obligor to subordinate its own financial interests to achieve the desired result, but it will not be expected to render itself insolvent. Nor must it have total disregard for its own shareholders' interests or irreparably damage its own goodwill. Endeavours clauses may require the obligor to apply for certain licences or permissions or appeal a decision. Even a best endeavours clause cannot require an obligor to do so if the action is doomed to fail.

REASONABLE ENDEAVOURS

While a best endeavours clause is not absolute, reasonable endeavours is even less so. The clause requires the obligor to balance all the commercial circumstances. The obligation does not require it to sacrifice its own commercial interests[2]; instead it must take into account the likelihood of achieving the desired result, the obligor's reputation, shareholders' interests, the cost and other relevant commercial considerations.

ALL REASONABLE ENDEAVOURS

In accordance with the natural meaning of the words, most commentators believe that this endeavours clause is middle ground between best endeavours and reasonable endeavours. In Rhodia v Huntsman[3] it was suggested that as best endeavours did in fact require some reference to reasonableness, it must mean that the obligor must take all the reasonable courses it can and therefore best endeavours was synonymous to all reasonable endeavours.

However, the recent case of CPC v Qatari disagreed. In CPC the parties had entered a joint venture to acquire and redevelop the Chelsea Barracks in the City of Westminster. Under a sale and purchase agreement (SPA), CPC sold its venture to Qatari Diar (QD). Under the SPA, QD owed CPC various obligations, including one to use “all reasonable but commercially prudent endeavours” to achieve thresholds in the SPA, in particular to make progress in obtaining planning permission for the proposed development. Strong opposition to the redevelopment plans from the Prince of Wales and the Mayor of London prompted QD to promote a new outline proposal and later withdraw the planning application altogether.

Amongst other matters, Mr Justice Vos was required to consider if QD's conduct in withdrawing the planning permission was in breach of its endeavours clause. Vos J examined previous case law and observed that all reasonable endeavours clauses did not always require the obligor to sacrifice his commercial interests. Such a clause was not, therefore, equivalent to a best endeavours clause.

In fact, the clause in CPC was even clearer on this point, because it had the added words, “but commercially prudent”. It expressly allowed QD to consider its own commercial interests alongside those of CPC and required it to take all reasonable steps providing they were commercially prudent.

PRACTICAL ADVICE

A lot of the uncertainty that can arise from endeavours clauses can be alleviated by the contract's original drafting. While it does not achieve certainty because satisfaction of the obligation is gauged at the time of performance when any number of unforeseen circumstances may have arisen, it can assist to specify certain steps that the obligor must take as a minimum (whilst making it clear that those steps do not otherwise limit the obligation).

For example, one requirement could be the provision of a parent company guarantee. If the obligation is likely to involve a financial outlay it may be worth setting the parameters for that as well the period in which the obligor should pursue that objective. If the obligor is required to deal with a regulator, it may be worth setting out the particular steps that will require such as the provision of information. Other clauses set a standard by which the obligor will be judged. If the obligation is to achieve a sale, for example, the standard could be a prudent seller, determined to complete a sale.

In light of the CPC case, we may see more contracts in which the embellished, all reasonable but commercially prudent endeavours clause is used. The extra wording was not critical to Vos J's decision as he found that a simple all reasonable endeavours clause did not allow for the obligor to sacrifice its own commercial interests, but the three extra words serve to avoid any doubt.

Finally, the relevant word is commercial . Due to the political nature of the CPC case (the intervention by the Prince of Wales and, to a lesser extent, the Mayor of London), Vos J stressed that an endeavours clause did not allow for a consideration of the obligor's political interests in so far as they are different from its commercial interests or in so far as they require commercially imprudent measures.

For more advice on endeavours clauses and contract disputes, contact the Commercial Dispute Resolution Group.

[1] IBM United Kingdom v Rockware Glass Ltd [1980] FSR 335
[2] P&O Property Holdings Limited v Norwich Union Life Insurance Society [1993] EGCS 69
[3] Rhodia International Holdings Ltd v Huntsman International LLC [2007] EWHC 292
[4] CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010] EWHC 1535