So, you’ve set your sights on new horizons

It’s an amazing feeling isn’t it? You’ve generated a winning concept, got the buy in, had productive meetings with your new partners. All that’s left now is to set the course and sail off into a successful sunrise together.

Or is it?

Entering into a mutually beneficially commercial contract with likeminded partners is the end goal of all business transactions. Such relationships can propel businesses into the stratosphere or leave them floating in the water.

As we all know, a well-written commercial contract is the key success factor here. These contracts charter the course for who is responsible for making what happen and when in order to reach the destination.

Businesses tend to use endeavour clauses in contracts when they have a clear objective in mind, but the exact steps needed to achieve the end result are not clear at the outset. That is, the commitment is to “try” to fulfil the obligation and not to commit to it absolutely. Before embarking on any optimistic adventure, it is vital to get a concise overview of what obligations you are sailing into, and how to navigate anything unforeseen that could scupper your plans.

At Law 365 we understand how turbulent these contracts can appear for business owners and can help you find your way through.

Navigating the journey: endeavour clauses

To help you steer your course we have provided a bird’s eye view of the potential clauses you may meet along the way, and what they could mean for your venture.

Best endeavours

The most onerous clause of the bunch, a best endeavour situation means a service provider is obligated to complete all the steps available to try to achieve the objective. This means everything in their power, even if this means putting their own interests aside. It doesn’t mean the objective has to be achieved, but that every single reasonable avenue must be followed to try to reach that outcome – up to and including financial outlay or a redirection of resources.

IBM United Kingdom v Rockware Glass Ltd [1980] FSR 335 explains that service providers are obliged:

“to take all those steps in their power which are capable of producing the desired results… being steps which a prudent, determined and reasonable [oblige], acting in his own interests and desiring to achieve that result, would take”

Reasonable Endeavours

The case Pips (Leisure Productions) Ltd. v Walton [1982] 43 P&CR 415 tells us that being “reasonable” means that a person:

“must at least be doing of all that reasonable persons could reasonably do in the circumstances”

This clause is the most widely used in commercial contracts as it requires the service provider to take a reasonable course of action to achieve the objective, even if there are other options available. These are not expected to be measures that could be detrimental to the company’s commercial activities.

Both clauses sound similar – so how do you know what is required of you?

A well-respected QC – Sir Julian Flaux – summarised the differences in the case Rhodia International Holdings Ltd v Huntsman International LLC [2007}. In simple terms the difference between best endeavours and reasonable endeavours is the amount of options available to the service provider to achieve the objective. To prove requirements have been met for reasonable endeavour, a firm needs to show one reasonable approach had been carried out to its fullest extent. A best endeavour requirement is to take all possible actions, until exhausted, to attempt to meet the objective. This may include some financial outlay but not to an extent that would be damaging to the business.

All reasonable endeavours

Sitting happily between the previous two clauses, all reasonable endeavours put itself forward as a compromise clause. It is difficult to define precisely, given that the endeavours required in any contract to achieve an outcome will always be unique to the case itself. Due to this uncertainty, three questions are raised:

  • In my contract would it mean best endeavours?
  • In my contract, would the service provider be expected to use all commercial interests to achieve objective?
  • Will this be applied to the specific circumstances available for my contract?

There are two available answers. A general Court discussion led to the conclusion that all reasonable endeavours do naturally mean best endeavours. This thinking is basically the idea that a service provider, using ALL the courses of action available to meet an objective, is the same as a service providing using best endeavours. The second answer produced in a Court discussion was that all reasonable endeavour is:

“probably a middle position somewhere between the two, implying something more than reasonable endeavours but less than best endeavours” (UBH v Standard Life).

All reasonable but commercially reasonable endeavours

This is a lesser known clause but has proved useful where the service provider is able to consider their own commercial interests balanced against the endeavour clauses agreed on in working towards the contract obligations.

Ready, set, go!

It is important to remember that all endeavours – no matter what form they may take – are still less than an absolute obligation to perform the contractual requirements, but that doesn’t mean they are not important!

The best way to ensure smooth sailing and reduce the likelihood of disputes arising is to carefully consider which steps are right for you, and how you want these to be made clear and simple in your legal documents.