Best and reasonable endeavours clauses
Contracts in a construction context often contain “best” or “reasonable endeavours” or even “all reasonable endeavours” clauses. There have been a number of recent decisions where the courts have had to consider quite what these obligations require of those who sign up to them.
Best endeavours’ clauses make it clear that a best endeavours provision is sufficiently certain to be enforceable. Essentially such an obligation imposes a duty to do what can reasonably be done in the circumstances. Best endeavours means what it says - it does not mean second best endeavours. A party required to use its best endeavours is afforded less discretion and must, bar some qualifications, “leave no stone unturned”1 in its attempts to comply. However, equally, it is not the “next best thing to an absolute obligation or a guarantee.”2 The whole purpose of using the term is to qualify the obligation under the contract. That said, the extent to which the obligation is qualified will depend on the wording used, as well as the circumstances of the particular case. What matters is the commercial context and intentions of the parties.
It is usually thought that reasonable endeavours is less onerous than best endeavours. The Court of Appeal in UBH (Mechanical Services) v Standard Life Assurance3 concluded that the exercise of reasonable endeavours involves a “balancing act whereby [the obligor] is obliged to put in one scale the weight of their contractual obligation to [the other party], and in the other they [are] entitled to place all relevant commercial considerations”. Relevant commercial considerations were held to include: relationships with third parties; the obligor’s reputation; the cost incurred by the obligor; and the chances of achieving the desired result. Whilst the expected actions of the obligor are dependent on the individual circumstances of the case, an obligation to use reasonable endeavours will not require the obligor to “sacrifice its own commercial interests”. One exception to this is that where the contract actually specifies that certain steps have to be taken as part of the exercise of reasonable endeavours, those steps will have to be taken, even if that could be said to involve the sacrificing of the commercial interests of a party.
In the case of CPC Group Ltd v Qatari Diar Real Estate Investment Company,4 the court was asked to consider the meaning of a slightly differently worded obligation to use “all reasonable but commercially prudent endeavours.” This, according to Mr Justice Vos, was not the equivalent to a “best endeavours” obligation and the clause did not require QDREIC to ignore or forgo its commercial interests. Instead, the clause allowed QDREIC to consider its own commercial interests alongside those of CPC, and required it to take all reasonable steps (here to procure the planning permission), provided those steps were commercially prudent.
Jet2.com Ltd v Blackpool Airport Ltd 5
In 2012, the Court of Appeal came to a slightly different conclusion, holding that an obligation to use “all reasonable endeavours” could include an obligation to act against your own commercial interests. A party under an obligation to use “all reasonable endeavours” cannot necessarily use cost or inconvenience as a grounds for not doing something where performance is under its control and does not depend on cooperation from a third party. The case arose out of a 15-year agreement for the operation of flights out of Blackpool Airport. Clause 1 of the Agreement stated that “Jet2 and BAL will co-operate together and use their best endeavours to promote Jet2’s low cost services from Blackpool Airport and BAL will use all reasonable endeavours to provide a cost base that will facilitate Jet2’s low cost pricing.”
There was nothing in the agreement about the scheduling of Jet2’s flights and the times at which these could take place. However, with the support and cooperation of BAL for 4 years, Jet2 operated flights outside of the airport’s published operating hours. By allowing departures outside hours the airport ran at a loss. On 22 October 2010, BAL told Jet2 that from midnight on 29 October 2010 it would not accept departures or arrivals scheduled outside normal hours. Jet2 obtained an injunction, and sought a declaration from the court that BAL was required under the agreement to allow Jet2 to run its previous operating hours. BAL said that the provisions of the Agreement that obliged it to cooperate and use best endeavours to promote Jet2’s low cost services from the airport and to use all reasonable endeavours to provide a costs base that would facilitate Jet2’s low-cost pricing did not require it to act against its own commercial interests. However, BAL also argued that its duties to use best or all reasonable endeavours did not require it to act against its own commercial interests (i.e. by running the airport at a loss). HHJ Mackie QC held that BAL was in breach of contract in refusing to handle flights outside of normal operating hours. This was a low-cost airline operation. BAL did not have the freedom to consider its own commercial interests in performing its endeavours duties. However, he did not grant Jet2 the declaration that aircraft movements should be allowed between 6 a.m. and midnight. In the context, it was “improbable” that the clause could be interpreted by the parties:
“to mean that one of them could limit or abandon performance once it became commercially undesirable or unprofitable, just the sort of risks that parties expect to undertake when they contract. Any such unusual provision would have to be explicit before being accepted as part of what had been agreed.”
BAL appealed, arguing that clause 1 was vague and uncertain. It was a statement of aspiration. It had not been intended to create legal rights and obligations. For example, in Little v Courage, Millett LJ had stated:
“An undertaking to use one’s best endeavours to obtain planning permission or an export licence is sufficiently certain and is capable of being enforced; an undertaking to use one’s best endeavours to agree, however, is no different from an undertaking to agree, to try to agree or to negotiate with a view to reaching agreement; all are equally uncertain and incapable of giving rise to an enforceable obligation.”
Jet2 said the parties had taken it for granted that it would need to schedule aircraft movements outside normal opening hours and that, by using its best endeavours to promote Jet2’s business, BAL would ensure that it could do so. By a majority, the Court of Appeal agreed. The key difference was between a clause whose content is so uncertain that it is incapable of creating a binding obligation and a clause that gives rise to a binding obligation, the precise limits of which are difficult to define in advance but which can nonetheless be given practical content. Moore-Bick LJ confirmed that generally:
“an obligation to use best endeavours, or all reasonable endeavours, is not in itself regarded as too uncertain to be enforceable provided that the object of the endeavours can be ascertained with sufficient certainty.”
Applying this principle to the facts of the case, the majority held that the object of the “best endeavours” obligation to promote Jet2’s business was not too uncertain and therefore placed a binding obligation on BAL which extended to accepting departures and arrivals outside of the airport’s normal operating hours. Lewison LJ, who disagreed with the majority, held that the endeavours duty was unenforceable for uncertainty. He noted:
“It is…possible for a commercial organisation to undertake a positive commitment to run a business for a period as long as 15 years. It is even possible for such an organization to undertake a positive commitment to run a loss-making business for that period. But it would, I think, be an unusual obligation; and a businessman would expect such an obligation to be spelled out in clear words.”
The majority also agreed that the obligation to use all reasonable endeavours obliged BAL to act against its own commercial interests, holding that the losses incurred by BAL had not justified its actions. Whether, and if so to what extent, a person who has undertaken to use his best endeavours can have regard to his own financial interests will depend very much on the nature and terms of the contract in question. Here, the ability to schedule aircraft movements outside normal hours was essential to Jet2’s business and was therefore fundamental to the agreement. In those circumstances one would not expect the parties to have contemplated that BAL should be able to restrict Jet2’s aircraft movements to normal hours simply because it incurred a loss each time it was required to accept a movement outside those hours, or because keeping the airport open outside normal hours proved to be more expensive than it had expected. On the other hand, there was force in the argument that if it became clear that Jet2 could never expect to operate low-cost services from Blackpool profitably, BAL would not be obliged to incur further losses seeking to promote a failing business. LJ Longmore stated:
“the fact that [a party] has agreed to use his best endeavours pre-supposes that he may well be put to some financial cost, so financial cost cannot be a trump card to enable him to extricate himself from what would otherwise be an obligation”.
Ampurius Nu Homes Holdings Ltd v Telford Homes (Creekside) Ltd 6
Telford, a developer, agreed to build and develop four properties and grant long leases of the commercial units to Ampurius. Although work started promptly on the construction, in March 2009 Telford decided that it would be necessary to put work on Blocks A and B on hold because of funding difficulties. Work on those blocks did not resume until early October 2010. Ampurius sought to terminate the contract by letter from its solicitors dated 22 October 2010 on the basis of repudiatory breach by Telford. Telford itself terminated the contract on 9 November 2010 following non-payment by Ampurius of monies said to be due. There was no termination clause in the contract, although Telford agreed to use its reasonable endeavours to procure completion of the Works by the Target Date or as soon as reasonably possible thereafter.
The Judge found that Telford were in breach because they had stopped work, something which was contrary to the obligation to proceed with due diligence. Strictly, this meant that the Judge did not need to consider the question of reasonable endeavours. Telford had submitted that the expression encompassed financial resources, so that if Telford could not complete by the Target Dates because of its funding problems, it would not be in breach so long as it had made reasonable endeavours to procure finance. The project was blighted by the failure of Lehman Brothers just after the execution of the agreement. The Judge accepted that Telford had done all that could reasonably be done in that regard. However, the Judge did not:
“think that a ‘reasonable endeavours’ clause as regards the time of completion in what is, in this respect, a construction contract can extend to endeavours to have sufficient money to perform the contract. Although the language could literally bear that meaning, in my judgment, on an objective reading the qualification of “reasonable endeavours”, as opposed to an absolute obligation to complete, is designed to cover matters that directly relate to the physical conduct of the works, thereby providing an excuse for delay in such circumstances as inclement weather or a shortage of materials for which the Defendant was not responsible. The clause does not, in my view, extend to matters antecedent or extraneous to the carrying out of the work, such as having the financial resources to do the work at all.“
Conclusions
That a party cannot rely on its own financial difficulties to excuse failure to use reasonable endeavours is perhaps not unexpected and reflects the approach the courts have taken to claims that a contract has been frustrated or otherwise suspended due to the financial crisis.7 However, these cases demonstrate that best or reasonable obligations can create uncertainty as to what exactly is required of a party to a contract. As with any obligation, the more precise the endeavours clause in a contract, the less likely it is to lead to disputes. Whilst the courts are willing to uphold an endeavours clause especially where a contract is already being performed, in order for it to be valid, the parties need to be clear on its objective. If not then the clause may not be enforceable.
However, when it comes to acting against one’s commercial interests, it is clear that what a particular party should do to comply with a ‘best endeavours’ obligation will depend on the context of the clause and the factual background. Therefore, where possible, parties might want to consider whether it is practical or possible to specify the steps a party is required to take (or not take) in order to comply with an obligation. This could be done by setting criteria by which a party’s endeavours can be assessed. Care should be taken to record any steps that are taken to comply with the obligation. Remember too that any change in approach might be taken to be evidence that the clause is no longer being complied with.
- 1. Sheffield District Railway Co v Great Central Railway Co [1911] 27 TLR 451.
- 2. Midland Land Reclamation Ltd & Anr v Warren Energy Ltd [1997] CILL 1222.
- 3. [1986] TLR 13 November.
- 4. [2010] EWHC 1535
- 5. [2012] EWCA Civ 417.
- 6. [2012] EWHC 1820 (Ch).
- 7. See Thames Valley Power v Total Gas & Power [2006] I Lloyd’s Rep 441.