Commercial contracts often impose obligations on a party to use their “best endeavours” or “reasonable endeavours” to perform a particular contractual obligation. For example, in a contract for the purchase and sale of land, one of the parties may be under an obligation to use their “best endeavours” or “reasonable endeavours” to obtain development approval for the land.
The following paragraphs detail how “best endeavours” and “reasonable endeavours” obligations are interpreted, whether the two terms impose different obligations and the ramifications for failing to comply with such obligations.
The starting point for any discussion regarding how a “best endeavours” obligation in a commercial contract is to be interpreted is the High Court of Australia’s decision in Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83 (“Transfield”).
In Transfield, Mason J held that a “best endeavours” clause prescribed a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the person owing the obligation viewed in the light of the particular contract.
In Hospital Products Ltd v United States Surgical Corporation and Others (1984) 156 CLR 41, Barwick CJ held that “an obligation to use “best endeavours” does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual obligation, but no more.”
Since the decisions of the High Court of Australia in Transfield and Hospital Products, the various Australian state courts have attempted to clarify and develop the High Court’s interpretation of the “best endeavours” obligation. The following propositions can be distilled from those authorities:
- an obligation to use “best endeavours” to achieve a contractual object requires the obligor to do all he or she reasonably can to achieve the contractual object;
- the words “best endeavours” mean what they say – best endeavours, not second-best endeavours; and so, within reasonable limits, they require the obligor, broadly speaking, to leave no stone unturned to achieve the object in view;
- a person subject to a “best endeavours” obligation is required to do the acts required to achieve the object with the same vigour expected of a party attempting to secure its own interests until the party reasonably considers that further attempts to achieve the object of the obligation would have a remote chance of succeeding; and
- a party subject to a “best endeavours” obligation is required to do all it can reasonably do to act in the same manner as a reasonable and prudent party would if it was acting in its own interests to achieve a certain object.
The Courts have held that an obligation to use “reasonable endeavours” is necessarily conditioned by what is reasonable in the circumstances, which can include circumstances that may affect an obligor’s business.
In Australian Securities Commission v Gallagher (1994) 1 WAR 105, the Court held that the test for whether “reasonable endeavours” have been used is to determine whether the promisor used “a fair, proper and due degree of care and ability as might be expected from an ordinarily prudent person with the same knowledge and experience as the [promisor] in the [promisor’s] particular conduct or omission and under the particular circumstances.” The Court’s interpretation of this obligation bears an extremely close resemblance to Mason J’s interpretation of the “best endeavours” obligation in Transfield.
Practically speaking, there is no real effective difference between a “best endeavours” obligation and a “reasonable endeavours” obligation as regardless of the expression, parties are usually required to do all that is reasonable in the circumstances.
It is to be noted that the Courts in Australia consider that substantially similar obligations are imposed by either expression.
The ramifications of failing to comply with a “best endeavours” or “reasonable endeavours” obligation in a commercial contract can be serious. A party’s failure to meet the required standard will constitute a breach of contract entitling the non-defaulting party to a damages award. Furthermore, depending on the circumstances and the nature of the obligation, the non-defaulting party may be entitled to terminate the contract.
Given the serious ramifications that can flow from a failure to comply with a “best endeavours” or “reasonable endeavours” obligation, parties to commercial contracts should seek legal advice before agreeing to be bound by such obligations. Parties should also understand what steps they are required to undertake to comply with such obligations and the consequences that can flow from a failure to do so.
Marino Law has extensive experience in acting for parties to commercial contracts. Our highly experienced lawyers regularly:
- draft and review commercial contracts that include “best endeavours” and “reasonable endeavours” obligations;
- provide advice as to what is required to comply with contractual obligations including a “best endeavours” or “reasonable endeavours obligation; and
- act on behalf of parties involved in contractual disputes including the commencement and defence of breach of contract proceedings.
Should you require assistance in any of the above areas, please contact one of our highly experienced lawyers.