Meaning of "all reasonable endeavours"
04 October 2010
Vos J held that such an obligation is not equivalent to "best endeavours" and does not always require the obligor to sacrifice its own commercial interests.
The use of the words "all reasonable but commercially prudent endeavours" in a sale and purchase agreement made it clear that the obligor was not obliged to sacrifice its own commercial interests. The case adds to conflicting case law on this term. This article also includes a reminder of the meaning of "reasonable endeavours" and "best endeavours".
The use of the expressions "best endeavours" and "reasonable endeavours" is common in commercial contracts and is often the subject of discussion as to what exactly these phrases mean. In particular, the expression "all reasonable endeavours" has been the subject of conflicting case law.
The case arises from the redevelopment of the Chelsea Barracks site in London. For the purposes of the redevelopment, CPC Group (CPC) and Qatari Diar Real Estate Investment Company (QD) entered into a joint venture in which CPC owned 20% equity. The joint venture, via a subsidiary, acquired the barracks site. The subsidiary applied for planning permission for the site in April 2008. In November 2008, CPC sold its interest to QD for an initial consideration of £38 million and a deferred consideration totalling a maximum of £81 million, depending mainly on future progress being made in obtaining planning permission for the site. QD owed various obligations in the purchase agreement (SPA), including one to use all reasonable but commercially prudent endeavours to enable the achievement of the thresholds for the payment of the deferred consideration, and both parties owed each other an express duty to act in the utmost good faith.
Following a meeting between His Highness the Emir of Qatar and His Royal Highness the Prince of Wales, QD withdrew its planning application. A dispute arose as to whether QD was entitled under the SPA to do so.
Although there were a number of legal issues in dispute between the parties, it is Vos J’s findings on the meaning of the "all reasonable endeavours" obligation that is of most interest for the purpose of this Review.
Meaning of "all reasonable but commercially prudent endeavours"
In UBH (Mechanical Services) Ltd v Standard Life The Times, 13 November 1986, Rougier J stated (obiter) that an obligation to use all reasonable endeavours "probably" lay between best and reasonable endeavours. On the other hand, in Rhodia v Huntsman  EWHC 292 (Comm), Flaux J thought that "it may well be" that an obligation to use all reasonable endeavours equated with using best endeavours. In Yewbelle v London Green  EWCA Civ 475, Lloyd LJ agreed with Lewison J at first instance that, in using its reasonable endeavours, the appellant was not required to sacrifice its own commercial interests.
After considering the conflicting case law, Vos J concluded that the expression "all reasonable endeavours":
- is not equivalent to "best endeavours";
- does not always require the obligor to sacrifice its commercial interests; and
- does not allow the obligor to consider its own political interests in so far as these are different from its commercial interests.
Vos J considered the overall commercial context of the SPA, and relied on other terms in the SPA that made it clear that QD was not to be required to sacrifice its commercial interests in this case. In particular clause 7.1 made that clearer by using the added words "all reasonable but commercially prudent endeavours".
The judgment also includes a short reminder of the meaning of the obligation of utmost good faith, drawn from existing case law. Noting that the obligation "must take its colour from the commercial context of the contract", Vos J found that it meant that the obligation was to adhere to the spirit of the contract, which was to seek to obtain planning consent in the shortest possible time, to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties.
Vos J concluded that QD had not breached the SPA.
Comment: These "best" or "reasonable" endeavours obligations are often the source of discussion between parties and their advisers. They are often used in a commercial contract where it has not been possible for the parties to agree on an absolute obligation to do something. It is important to be aware of the subtle differences between the different formulations. By way of a reminder:
A "best endeavours" obligation:
- is not an absolute obligation but is more onerous than a reasonable endeavours obligation;
- requires a party to do what is "commercially practicable";
- is qualified by a test of reasonableness. The standard of reasonableness is that of a reasonable and prudent board of directors acting properly in the interests of their company and in applying their minds to their contractual obligations;
- requires a party to exhaust all of a number of reasonable courses which could be taken in a given situation to achieve a particular aim;
- does not require a party to take action which could lead to its financial ruin, or which would undermine its commercial standing or goodwill (Monkland v Jack Barclay Ltd  2 KB 252), although there will be cases where it is reasonable to expect the obligor to invest and take the risk of success or failure where there is a reasonable chance of commercial success;
- can be qualified by other duties such as the duty of directors to act in the best interests of the company; and
- if the relationship between obligor and obligee is fiduciary in nature, might mean the obligor has to sacrifice its own interests to those of the obligee.
It should be noted that compliance with the duty to use best endeavours will be assessed with regard to the time of performance of the act to which the duty relates, rather than at the time of entry into the contract.
On the other hand, an obligation to use "reasonable endeavours" is considerably less onerous than an obligation to use "best endeavours":
- where there is range of reasonable courses available to the obligor, an obligation to use reasonable endeavours to achieve the aim only requires it to take one reasonable course, not all of them; and
- a party is entitled to put its own commercial interests (eg relationships with third parties, the reputation of the obligor and the costs to be incurred by the obligor) to the forefront, subject to the important exception that if the contract specifies that certain steps have to be taken in performance of the obligation, these steps must be taken even if they involve the sacrifice of a party’s commercial interests.
Those involved with the negotiation of such clauses may want to consider bringing greater certainty to a requirement to use best or reasonable endeavours. For example:
- a best endeavours obligation to obtain any authorisations, consents, approvals or licences might include a cap on the extent of the obligation, eg a limit on financial expenditure, or minimum spend, or a minimum or maximum time period in which efforts must be made;
- an obligation to use best endeavours to enter into a contract with a third party could include an indication of the maximum potential financial exposure involved in the obligation;
- where the obligation is to use best or reasonable endeavours to obtain regulatory clearance for a merger, there could be a statement of the specific steps that should be taken. This should be framed as an "including, but not limited to" obligation in order to allow for other steps to be taken if necessary; or
- if it is envisaged that legal action might be necessary, this should be specifically stated, including whether any appeal should be made.
Of course, if a party wants to insist on a particular step being taken in a transaction then an absolute obligation will have to be used.
This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey firstname.lastname@example.org, or tel +44 (0)20 3088 3710.