Commercial property documents, like any other commercial contracts, impose obligations on the parties to them. Where the parties have control over whether or not these things happen (for example obligations to pay the rent and not to make any alterations to the property), it is appropriate that the obligations are absolute, allowing termination and/or a damages claim in the event of breach. However, some obligations depend on steps being taken by other people. In these circumstances the parties will not want to be under an absolute obligation, as they cannot control they outcome. Nonetheless, it is still appropriate that they 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 “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 particular 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 necessarily less stringent than an absolute obligation: if you are under an absolute obligation and you fail to meet it this will be a 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”) 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 may be applied differently in a different context. However, it is established that “best endeavours” requires the most effort, “reasonable endeavours” the least and “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 appeals 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. You do not have to place yourself in the position of a person who is determined to achieve the particular 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).
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 theJet2.com v Blackpool Airport case when it was found that the obligor should have operated the airport at a loss in order to satisfy its “all reasonable endeavours” obligation.
It is important to note that if a contract specifies particular 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 have fallen within what would normally 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 as a whole, 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?
- In the event that 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?