Interpreting endeavours clauses

Contracts often include obligations to achieve a particular outcome, or procure its achievement. Unless qualified, these will amount to an absolute obligation, with failure to achieve the obligation – no matter how onerous – placing a party in breach. It is therefore common for parties to qualify such obligations using an endeavours clause.

By inserting an endeavours qualification parties are in effect only agreeing to ”try” to achieve the particular contractual obligation. But this raises the question of the lengths a party has to go to in "trying" to achieve that obligation. It is clear from the case law that there is a spectrum of endeavours clauses, with reasonable endeavours at one end and best endeavours at the other. However, contracting parties should always be cautious when using such clauses, as their precise scope is unclear and will always depend on the circumstances.

The issue of enforceability can also cause difficulties in connection with endeavours clauses, as illustrated by the recent case of Astor Management AG and others v Atalaya Mining PLC. The decision highlights the difficult issues that endeavours clauses can give rise to.

Here we look at those issues, the spectrum of endeavours obligations, and provide practical guidance for those drafting these clauses.

Enforceability

An issue often raised in the context of claims for breach of an endeavours clause is whether the obligation was enforceable in the first place. This was argued in Astor Management. In that case the defendants had purchased the claimants' interest in a dormant mining project. Most of the payments to be made were deferred and would only become payable once the defendants had secured the necessary permits to restart mining, and obtained funding to restart the mining operations by way of a senior debt facility.

The contract stated that the defendants were "to use all reasonable endeavours to obtain the Senior Debt Facility ….and procure the restart of mining activities in the Project on or before 31 December 2010…". Astor argued that the defendants were in breach of that obligation in that they failed to obtain funding by way of a senior debt facility, and instead secured funding by alternative means. 

In order to establish that an endeavours obligation is enforceable, it has to be shown that: 

• the object of the endeavours is sufficiently certain, and 
• there are sufficient objective criteria by which to evaluate the reasonableness of the endeavours.

The object is sufficiently certain

When looking at an endeavours clause, the certainty of the underlying objective will be key in determining enforceability. The issue does not arise where best or reasonable endeavours are to be used to do something, such as obtain planning permission or an export licence. However, it can be more difficult to enforce an agreement to use best or reasonable endeavours to agree something, as these clauses are often construed as no more than an agreement to agree. 

That said, the courts are increasingly willing to give legal effect to contractual provisions even when they are cast in very open-ended language. As confirmed in Astor Management, the courts will only hold that a clause is too uncertain to be enforceable as a last resort. 

A good example of this is the case of Petromec Inc and others v Petroleo Brasileiro SA, a case referred to in Astor Management. There a dispute arose in connection with a project to sell and upgrade a semi-submersible oil production platform. After execution of the agreements, the parties agreed to do extra upgrading work on the platform. Brasoil, agreed to pay the reasonable extra cost of the additional upgrade and the contract provided that "Brasoil agrees to negotiate in good faith" the extra cost involved. In finding that, in some circumstances, an obligation to negotiate in good faith will have legal effect, the Court of Appeal commented that: "It would be a strong thing to declare unenforceable a clause into which the parties have deliberately and expressly entered. ... To decide that [the clause] has “no legal content” …would be for the law deliberately to defeat the reasonable expectations of honest men…".

The Court in Astor Management had no difficulty in finding that the object of the endeavours clause was sufficiently certain. The Judge commented that it should almost always be possible to give sensible content to an undertaking to use best or reasonable endeavours to enter into an agreement with a third party. There was no problem of uncertainty of object, as there is no inherent difficulty in ascertaining whether an agreement with a third party has been made. 

Sufficient objective criteria

The requirement of sufficiently objective criteria is often raised. How can the courts enforce an obligation if there is no criteria against which to ascertain what is expected of the obligor? The Court of Appeal in Petromec accepted that it can be difficult to ascertain whether a breach has in fact occurred: there the Court had to assess whether the party had acted in good faith. However, it considered that difficulty is not enough for a court to withhold assistance from contracting parties by declaring the clause unenforceable. 

This was a point made in Astor Management. The Court commented that: "Where the parties have adopted a test of “reasonableness”, however, it seems to me that they are deliberately inviting the court to make a value judgment which sets a limit to their freedom of action." The Judge did accept that it may be difficult to establish breach of the obligation in circumstances where a court is required to second-guess a commercial party on matters of commercial judgement. Examples given included showing that a party ought reasonably to have pursued a negotiation with a particular lender, or accepted a given offer, or proposed a lower rate of interest. However, difficulty in establishing breach does not mean that the clause is in itself unenforceable. That argument was therefore rejected.

Has the obligation been breached?

When trying to work out what a particular endeavours clause means or, to use an athletics analogy, how high the hurdle has been set, the courts will apply general principles of contractual interpretation. In other words, the clause will be interpreted taking into account the commercial object of the contract, the nature of the object to which the endeavours undertaking attaches, the other contract terms and the surrounding factual matrix. 

However, the question of breach is determined by reference to the facts at the time of performance. In order to see whether a party has used, for example, "all reasonable endeavours" in securing a licence, the court will ascertain how high the hurdle was set at the time the contract was entered into, but then assess whether the party has cleared the hurdle by reference to the facts at the relevant time. This will often be difficult to determine. 

Although context is key in determining the "height of the hurdle", the particular words used will still be important. There are also other drafting mechanisms that can be used to assist in achieving certainty. 

Drafting endeavours clauses: the "height of the hurdle"

The most commonly used endeavours clauses are best endeavours, reasonable endeavours and all reasonable endeavours. However, there are no set definitions for each term. As His Honour Judge Mackie said in Jet2.Com: 

"The meaning of the expression remains a question of construction not of extrapolation from other cases… the expression will not always mean the same thing."

Fortunately the cases have provided guidance as to the key characteristics of the more commonly used endeavours clauses.

Setting the bar: the spectrum of obligations

Although it may not always be easy to work out exactly how high the bar is, case law has left us with a good idea of how the various endeavours terms sit on the spectrum of obligations.

Traditionally, "all reasonable endeavours" has been regarded as a compromise between reasonable endeavours and best endeavours. In other words sitting somewhere between the two. However, recent cases have challenged that thinking, treating "all reasonable endeavours" the same as "best endeavours". When drafting these clauses it is therefore prudent to consider an "all endeavours clause" as equally onerous as a best endeavours clause.

Best endeavours

The term "best endeavours" has received the most judicial scrutiny and is therefore the most tangible of the "endeavours" formulations. Traditionally it was viewed as a fairly onerous obligation but is now judged by standards of reasonableness, requiring an obligor to take all reasonable steps or all those steps in his power which a prudent and determined man acting in his own interest and anxious to achieve what is required would have undertaken (IBM United Kingdom Ltd v Rockware Glass Ltd).

This can involve the obligor sacrificing its own commercial interest. The question of whether, and to what extent, a person who has undertaken to use best endeavours can have regard to his own financial interests will depend on the nature and terms of the contract in question. That said, it is not an absolute obligation. While best endeavours will usually require expenditure on behalf of the obligor, it does allow the obligor some regard for its own commercial interests.

What practical actions may "best endeavours" require of the obligor?

• Significant expenditure. In Jet2.Com, an airport was required to remain open outside its usual opening hours despite incurring a loss while doing so.
• Litigation or an appeal against a decision if reasonable in the circumstances, i.e. not doomed to fail.

What mitigating factors may exist for the obligor?

• In limited scenarios regard for their own commercial interests. It would not require action resulting in the certain ruin of the company or the utter disregard of the company's interests.
• It will also not require the obligor to take action that is unreasonable in the circumstances. So, a covenantor's agreement to use his best endeavours to obtain planning permission meant that if planning permission was refused by the local planning authority and an appeal would have a reasonable chance of success, he was obliged to appeal. But not if the appeal was doomed to failure.
• Other duties overriding the best endeavours obligation. For example an obligation on directors of a company to use best endeavours to pass a resolution would not require directors to breach their statutory duties and to recommend a resolution to shareholders once it was no longer in the company's interests. 

Reasonable endeavours

Looking at the other end of the spectrum, an obligation to use reasonable endeavours is clearly "less stringent" than one to use best endeavours. The judge in Rhodia International v Huntsman summarised it nicely when he explained that an obligation to use reasonable endeavours probably only requires a party to take one reasonable course, not all of them, whereas an obligation to use best endeavours probably requires a party to take all the reasonable courses he can. 

As reasonable endeavours is viewed more from the obligor's perspective, it does not usually oblige a contracting party to sacrifice its own commercial interests, unless the contract specifically says so. A good example of this is the case of Phillips Petroleum Co UK Ltd -v- Enron Europe Ltd. In that case the parties were obliged to use reasonable endeavours to agree a delivery date of natural gas. Failing such agreement, the contract provided for a fallback date. Because of a fall in gas prices Phillips refused to agree an earlier date than the fallback date. Enron argued that they were in breach of their obligation to use reasonable endeavours to agree an earlier date. The Court of Appeal disagreed. Without an express provision to that effect the obligation to use reasonable endeavours did not impose such a restriction. The parties were entitled to take into account their own financial position and act in the manner most beneficial to them.

However, other than the commercial interests point, it is difficult to say exactly what "reasonable endeavours" entails. The courts have tended to take a more subjective approach, looking at the circumstances of the obligor rather than what a prudent man would do. One way the courts have looked at it involves the obligor balancing "the weight of their contractual obligation" to the other party against "all relevant commercial considerations", which includes the obligor's relations with third parties, its reputation and the cost of that course of action. If coupled with a clear objective, such as promoting or marketing a particular product, then the obligation is likely to require more of the obligor. 

Another factor to consider is the probability of achieving the desired result. The more doubtful the outcome, the less likely action will be required. So, for example, if you have agreed to use reasonable endeavours to obtain planning permission, consent has been refused on reasonable grounds, and prospects of success on appeal are doubtful, it is likely that no further action would be required. 

All reasonable endeavours 

All reasonable endeavours is the most difficult of the three. There is some uncertainty about where exactly it sits on the spectrum. Some cases have it somewhere between best and reasonable endeavours, and others equate it to using best endeavours. It all depends on the circumstances and the difference in opinion usually centres on the question of whether the obligor is required to sacrifice its own commercial interests. 

In Astor Management, where the defendant was required to use all reasonable endeavours to secure funding by way of a senior debt facility, the Judge considered that the question of whether, and to what extent, the obligor can have regard to his own financial interests was dependent on the nature and terms of the contract. In other words, the same test as applied to "best endeavours". On the facts, he considered that the defendant was entitled to have regard to its own financial interests in that the defendant was not obliged to obtain a senior debt facility at any cost or where to do so would make the project commercially unviable.

Another good example is the decision in Jet2.com v Blackpool Airport, which highlights that where an all reasonable endeavours obligation is both a core part of the agreement and under the control of the obligor, it is unlikely that the obligor will be allowed to limit or abandon performance once it became commercially undesirable or unprofitable. In that case Blackpool Airport was required to "use all reasonable endeavours to provide a low cost base to facilitate Jet2.com's low-cost pricing". The argument was whether this required the airport to open outside its published opening hours at a loss. Given that Jet2.com could not otherwise maintain its low costs base, the court considered that the obligation did require the airport to act against its own commercial interests. However, the Judge did make the point that it was not an absolute obligation and was not prepared to make an order for the opening hours sought by Jet2.com. Equally he was not prepared to say exactly what the obligation required of the airport in terms of opening hours, highlighting the difficulty of applying the obligation in practice.

Ultimately, how high the bar is set will depend very much on the facts and in particular, what the object to be achieved is and whether it is solely within the obligor's control. 

Drafting tips

It is always going to be difficult to predict how an endeavours clause is going to be interpreted if and when a dispute arises. However, there are ways of trying to achieve more certainty in the drafting. In particular:

1.  Avoid using untested words such as "utmost endeavours" or "commercially reasonable endeavours".

2.  If you do not want to have to sacrifice your commercial interests in satisfying the obligation, then provide for that expressly. So, for example, a party required to use "all reasonable but commercially prudent endeavours" will be permitted to consider its own commercial interests alongside those of the other party. 

3.  Alternatively, consider including a cap on the extent of the obligation, e.g. a limit on financial expenditure or whether there should be an appeal. 

4.  Ensure that the underlying obligation is sufficiently certain so that you avoid the agreement to agree problems.

5.  Set out the specific steps that need to be taken and do not need to be taken. Particular factors to consider include:

• Are there any specific steps the obligor must take or must avoid?
• Will the obligor be bearing any costs incurred when attempting to fulfil the obligation?
• How long should the obligor's attempts last?
• Must the obligor update the obligee as to their progress?
• What occurs if the objective is, or becomes, contrary to one of the parties commercial objectives?

6.  Where the obligation is one to use best or reasonable endeavours, there could be express criteria against which reasonableness is to be assessed. This will also help in ensuring enforceability of agreements to agree.

7.  Alternatively, set out some formula by which the relevant endeavour is judged. For instance "X shall take all reasonable steps which a prudent and determined [Seller] acting in its own interest and anxious to obtain [specify] would have taken". 

Cases referred to

Astor Management AG and others v Atalaya Mining PLC and others [2017] EWHC 425 (Comm)

Phillips Petroleum Co UK Ltd v Enron Europe Limited, Court of Appeal (Civil Division), [1997] CLC 329.

Petromec Inc and others v Petroleo Brasileiro SA and others [2005] EWCA Civ 891

Jet2.Com Ltd v Blackpool Airport Ltd [2011] EWHC 1529 (Comm)

Rhodia International Holdings Limited v Huntsman International LLC [2007] EWHC 292 (Comm)