Endeavouring to understand endeavours obligations

"Reasonable endeavours", "best endeavours" and "all reasonable endeavours" undertakings are commonly found in all types of commercial contracts and are frequently subject to negotiation. However, despite their ubiquitous use, the actual meaning of these expressions, and the extent of the obligations they impose, is not entirely clear. In addition, the case law creates a somewhat confusing picture.

Whilst not entirely eradicating the uncertainty in this area, the recent decision of the High Court in CPC Group Limited v Qatari Diar Real Estate Investment Company [2010] EWHC 1535 (Ch) offers some clarification and provides a salutary lesson that parties should carefully consider the extent of the "endeavours" obligations they want to impose.

CPC Group v Qatari Diar case

In brief, Qatari Diar Real Estate Investment Company (QD) and CPC Group Limited (CPC) were joint venture partners for a project to develop the former Chelsea Barracks site in London. The parties entered into a sale and purchase agreement, pursuant to which QD owed CPC various obligations, including an obligation to "use all reasonable but commercially prudent endeavours to enable the achievement of the various threshold events and Payment Dates" (Clause 7.1 of the SPA).

In June 2009, QD withdrew the planning application to redevelop the site following the intervention of the Prince of Wales and the resulting public and political objection. This effectively delayed one of the Payment Dates under the SPA. One of the questions the judge was asked to consider was whether the withdrawal of the planning application was a breach of QD's obligation to "use all reasonable but commercially prudent endeavours".

The judge rejected the submission that QD's behaviour was in breach of this obligation and having considered the Court of Appeal's decision in Yewbelle Limited v London Green Developments [2007] EWCA Civ 475 he found that:

• the wording "all reasonable but commercially prudent endeavours" did not equate to a "best endeavours" obligation; and
• the obligation to use "all reasonable endeavours" does not always require the obligor to sacrifice his commercial interests.

Whilst in CPC v QD the inclusion of the wording "but commercially prudent endeavours" helped clarify the obligation, it was not determinative to the judge's decision.

As a result of this judgment, the current legal position can be summarised as follows:

"Reasonable Endeavours"

• A "reasonable endeavours" obligation does not require the taking of an action insofar as it disadvantages the party under the obligation. However, this is 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 sacrificing of a party's commercial interests. There may also be an obligation to litigate, subject to the costs and the likelihood of success.
   This probably requires the obligor to take only one reasonable course in a given situation to achieve a particular aim, but not to exhaust all of them (obiter, Rhodia International Holdings Limited & Another v Huntsman International LLC [2007] EWHC 292 (Comm)).
• The use of "reasonable endeavours" has been defined by reference to an objective standard of what an ordinary competent person might do in the same circumstances and it allows commercial considerations to be taken into account (e.g. relationships with third parties, the reputation of the obligor and the costs to be incurred by the obligor).

"Best Endeavours"

• Whilst not akin to an absolute obligation, a "best endeavours" obligation is more onerous than a "reasonable endeavours" obligation.
• A "best endeavours" obligation is qualified by a test of reasonableness. Case law supports the contention that "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".
• Satisfying a "best endeavours" obligation does not require a party to take steps that would bring about its bankruptcy, or to continue in a course of action which would lead to the "certain ruin of the company or to the utter disregard of the interests of shareholders".
• A party should probably exhaust all of a number of reasonable courses which could be taken in a given situation to achieve a particular aim.
• A "best endeavours" obligation can require the party under the obligation to invest and take the risk of success or failure (e.g. proceeding to litigate), but only where there is a reasonable prospect of commercial success.  
• A "best endeavours" obligation can be qualified by other duties such as the duty of directors to act in the best interests of the company.

"All Reasonable Endeavours"

• This term remains the most nebulous of the three, although CPC v QD helpfully revisited the concepts touched on in the case of Rhodia v Huntsman.
• An "all reasonable endeavours" obligation does not necessarily equate to a "best endeavours" obligation (CPC v QD). However, in the context of the number of courses of action a party must take, there is some alignment between “all reasonable endeavours” and “best endeavours" (e.g. as is the case with "best endeavours", it appears that an "all reasonable endeavours" clause "requires you to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted" (Yewbelle v London Green)). However, these concepts may be distinct in terms of the commercial sacrifice an obligor has to bear.
• The obligation to use "all reasonable endeavours" does not always require the obligor to sacrifice his commercial interests (CPC v QD).
• An analysis of what is required to satisfy an "all reasonable endeavours" obligation will very much depend on the commercial context in which it appears (for example see the extensive analysis of the facts in CEP Holdings Ltd and CEP Claddings Ltd v Steni AS [2009] EWHC 2447 for what the court considered necessary for a distributor to discharge its "all reasonable endeavours" obligation).

Practical tips

When considering whether to incorporate any of these obligations into a contract, parties may be wise to adhere to the following practical guidance:

• Try to add certainty by setting out exactly what an obligor is required to do (or not do) to satisfy the obligation (for example, the obligor must make at least three planning applications). In some circumstances this may be difficult (for example, in relation to future and ongoing obligations). Where this is the case, to avoid being too prescriptive and limiting the scope of the actions an obligor is required to undertake, it is preferable, where possible, to use a formulation along the lines of "[best] [[all] reasonable] endeavours, including but not limited to: [specific actions ]", in the same way that, for example, a force majeure definition is often formulated.
• If the obligor is required to bear particular costs or incur expenditure to satisfy the obligation, consider including monetary caps or minimum spend thresholds.
• Explicitly state for how long an obligor should be required to pursue a certain course of action to satisfy its obligation and after what period of time a party will be able to "give up" without risking a claim for breach of the endeavours obligation.
• If it is envisaged that the obligation may entail taking legal action, specifically provide in the drafting for legal action (and subsequent appeals) to be undertaken to satisfy the objective.

Of course, if a particular action is absolutely essential to the transaction, the best course of action, to avoid any uncertainty, will be to insist upon an absolute obligation in the contract.

Conclusion

The question of whether a party should agree to use "best", "reasonable" or "all reasonable" endeavours is regularly raised during negotiations in almost every type of commercial agreement. However, whilst there are common law principles that offer some assistance in determining the scope of the obligations imposed by these terms, and CPC v QD has provided further guidance, their precise meaning remains ambiguous.

Whether future case law will assist in settling the meaning of these concepts in more certain terms remains to be seen. However, given the importance of the factual matrix in determining the extent of the obligations imposed it may be inherently difficult for the common law to evolve a generic set of standards or a test that will apply to all scenarios. This is an area of law which will undoubtedly be revisited by the courts.