September 2017
Many contracts include terms such as ‘best endeavours’, ‘reasonable endeavours’, or ‘all reasonable endeavours’? What do these terms mean? What is a party expected to do under these terms? The terms are often misunderstood. However, as a general rule, the terms are used to compel a person to take action to fulfil an obligation or condition that might be, to some extent, beyond that person’s immediate control. As with any contractual obligation, the devil is in the detail. Courts are often called upon to determine what is actually required of the person under the obligation.
A best endeavour obligation is more onerous on a party than an obligation of ‘reasonable endeavours’. It obliges a party to take all available courses of action to fulfil the obligation that a prudent, determined and reasonable person would take.
This will likely include spending money to fulfil the obligation. However, under current New Zealand common law, the party would not be expected to spend more than a reasonable amount of money or put itself in financial jeopardy.
An obligation to use ‘reasonable endeavours’ is less onerous. It is typically defined by reference to an objective standard of what an ordinary competent and reasonable person might do in the same circumstances. Under an obligation of ‘reasonable endeavours’ a person is able to balance their contractual obligations against their commercial operations, in deciding which course of action to pursue. Accordingly, a party is not required to take any course of action that might prejudice its own interests. But, if the clause sets out specific steps, then the party must take those steps regardless of cost.
Is this a middle ground between ‘reasonable endeavours’ and ‘best endeavours’? A recent court interpretation suggests there is no real difference between ‘all reasonable endeavours’ and ‘best endeavours’.
A party under an ‘all reasonable endeavours’ obligation may be obliged to take a course of action in order to fulfil that condition, where the action may result in the sacrifice of its own financial interests.
If a party is under an ‘all reasonable endeavours’ obligation to do something that is within its control, then that party is obliged to fulfil that condition and cannot choose what to do in light of its commercial interests. In the event that the term is extended to read ‘all reasonable but commercially prudent endeavours’, then the party concerned may consider its commercial interests in deciding how to fulfil the condition.
Where these matters are left to the court for interpretation, the situation will always be fact specific. However, caution should always be observed when using these terms.
To ensure that the interpretation of a contract or agreement does not end up in court, stipulate specific steps a party must take in order to fulfil a condition. This can be bolstered by setting a time frame in which the condition should be satisfied. Outlining possible penalties, remedies or responses if the condition is not fulfilled could add some clarity around what is expected by each party.
There are a number of cases before the courts reconsidering the meaning of ‘best endeavours’, ‘reasonable endeavours’, and ‘all reasonable endeavours’ the current interpretation of these terms may be subject to change.