Commercial contracts impose obligations on the parties to them as well as rights. Where the parties have complete control over performance of obligations (for example, obligations to make payments or not to carry out specified acts), it is appropriate that the obligations are absolute (eg “the buyer will pay the seller”). However, some obligations depend on steps being taken by other people. In these circumstances the performing party will not want to be under an absolute obligation to the other contracting party, as the performing party is not in complete control of the performance of the obligation. Nonetheless, it is still appropriate that the performing party should be placed under an obligation to at least try to ensure the outcome is achieved.
An obligation of this kind is known as an “endeavours” obligation: the party with the obligation (or the “obligor”) promises to try and make sure that the desired outcome happens. In a commercial property context these types of obligation arise most often when development work is being carried out, though they are also seen in other circumstances. Examples include:
- Obtaining an acceptable planning permission and agreeing the terms of planning agreements free from unacceptable conditions
- Ensuring that the members of the professional team observe the terms of their appointment
- Completing works by a specified date and in a specified way (for example, using specific materials and in compliance with permissions and codes)
- Obtaining consents from third parties (for example a superior landlord, a lender or the local authority)
- Preventing third party visitors to a property from carrying out prohibited acts
An endeavours obligation is less stringent than an absolute obligation: if you are under an absolute obligation and you fail to meet it, you will be in breach of contract. However, with an endeavours obligation there will only be a breach of contract if it can be shown that the obligor did not use sufficient efforts to achieve that outcome.
The type of endeavours obligation determines how much effort must be put into trying to achieve the outcome. While you will sometimes come across other terminology (for example “utmost endeavours” or “commercially reasonable endeavours”) the most common endeavours obligations are “best endeavours”, “reasonable endeavours” and “all reasonable endeavours”. There are no exact definitions for these terms; the differences between them have been established by case law, which means that they will be applied differently in different contexts. However, it is established that “best endeavours” requires the most effort, that “reasonable endeavours” requires the least, and that “all reasonable endeavours” probably requires something between the two (Rhodia v Huntsman).
It can be helpful to think of a “best endeavours” obligation as requiring you to do everything that you would do if you personally wanted that outcome to occur. The party with the obligation must place himself in the shoes of a prudent, determined, reasonable person, acting in his own interests and desiring that result (IBM v Rockware Glass). For example, a best endeavours obligation may require significant expenditure (Jet2.com v Blackpool Airport) and may require that a party takes part in litigation or appeal a decision (Malik v Central European Trading Agency).
However, a best endeavours obligation does not require a party to take actions which would lead to its financial ruin or undermine its commercial standing (Terrell v Mabie Todd) and nor does it require steps to be taken that have no likelihood of success.
If you are required to use “reasonable endeavours” you can keep your own commercial interests in mind – your relationships with third parties, the cost of pursuing a course of action and your own reputation are all relevant considerations (UBH v Standard Life). You do not have to place yourself in the position of a person who is determined to achieve the outcome, so it may well be acceptable, for example, to pursue one reasonable course of action rather than exhausting every course of action open to you (Rhodia v Huntsman). Nor would you be expected to take a course of action that you have reasonably concluded wouldn’t make any difference (Minerva v Greenland Ram). The test for determining performance of a reasonable endeavours obligation is an objective one and requires a response to the question: ‘what would a reasonable and prudent person acting properly in their own commercial interest and applying their minds to their contractual obligation have done to try to achieve the objective’ (Minerva v Greenland Ram).
ALL REASONABLE ENDEAVOURS
An “all reasonable endeavours” obligation is the most difficult to define. It is often used as a compromise between best and reasonable endeavours, but it’s not clear that it sits neatly between them. While there have been obiter statements from the courts to the effect that it is a middle position between the two (UBH v Standard Life) it may in fact be closer to one or the other depending on the circumstances.
A good analysis may be that while a reasonable endeavours obligation requires you to try just one reasonable course of action and a best endeavours obligation requires you to try everything that doesn’t lead to your commercial ruin, an all reasonable endeavours obligation requires you to take every course of action which doesn’t compromise your own commercial position. However, this generalisation won’t apply in every situation, and, in some cases, it is difficult to see what additional steps a party would have had to take if the obligation were “best” rather than “all reasonable” endeavours. An example of this can be seen in the Jet2.com v Blackpool Airport case when it was found that the obligor should have operated the airport at a loss to satisfy its “all reasonable endeavours” obligation.
It is important to note that if a contract specifies the steps which must be taken as a part of the obligation, these steps are treated as absolute obligations and must be taken even if they wouldn’t normally have fallen within what would be required by the endeavours obligation. For example, a party under a reasonable endeavours obligation which specifically includes an obligation to appeal a planning decision must appeal that decision even if it is not objectively reasonable to do so, and even if it is damaging to his own commercial interests.
As there is uncertainty around what exactly is meant by the different types of endeavours obligations, it may be advisable, particularly where the desired outcome is significant to the transaction, to give some further thought to precisely what is required. Points to consider include:
- Are there any specific steps that the obligor is or is not required to carry out?
- Must the obligor incur any expenditure in fulfilling the obligation? If so, is there a cap on this?
- Is there any time limit on how long the obligor must keep trying to fulfil the obligation?
- Is the obligor obliged to take any legal action? Must he appeal any decisions? If so, must there be a specified percentage chance of success?
- Is there any obligation to provide progress updates? What records must the obligor keep of the steps taken and how frequently must these updates be given?
- If the obligor is unable to achieve the objective must he step to one side and allow the other party to try? Is he required to give any indemnity in respect of this?
- Is the obligor permitted to take his own commercial interests into consideration?