Parties resort to endeavours clauses in contracts when they cannot foresee precisely what action will be required to achieve their objective. Of course, the parties have to be able to identify the objective. Agreements to agree are at risk of being void e.g. "the parties will use reasonable endeavours to agree a re-programming of (works)". But an agreement that one party will use certain endeavours, for example, to obtain a planning permission, s.106 agreement or the release of a restrictive covenant, are in principle enforceable.
The problem comes when it becomes apparent what steps are actually required and a dispute arises over whether the promising party (the promisor) has to embark upon that course of action to comply with the contract. The outcome will depend on the specified level of endeavours: reasonable, best, all reasonable or all reasonable but commercially prudent. We explain the difference between these types of endeavours.
Reasonable endeavours
Reasonable endeavours requires the promisor to take a reasonable course to achieve the objective, even if other courses of action are available. It would not normally require measures that would be harmful to the promisor's commercial interests e.g. in P&O Property v Norwich Union [1994] an obligation to use reasonable endeavours to secure lettings did not extend to having to pay reverse premiums to tenants.
Best endeavours
Best endeavours is the most onerous alternative. It does not impose a strict obligation to achieve the objective but "it does not mean second best endeavours". It is an obligation to take all steps that a prudent and determined person acting in their own interests and desiring the result would take. The promisor must do all in its power to bring about the result, even if that means subordinating its own interests.
In Jet2.com v Blackpool Airports [2012] an airport operator had promised to use its best endeavours to promote low-cost services by a budget airline. This meant it had to allow that airline to operate outside the normal opening hours of the airport, even if that meant the airport made a loss on those services, if that was the only way to promote the business as it had promised.
All reasonable endeavours
All reasonable endeavours is commonly adopted as a compromise between best endeavours and reasonable endeavours. In reality, the interpretation of all reasonable endeavours can be uncertain.
In Rhodia International Holdings Ltd v Huntsman International LLC [2007] the judge observed that: "an obligation to use best endeavours probably requires a party to take all the reasonable courses he can. In that context, it may well be that an obligation to use all reasonable endeavours equates with using best endeavours”. But if the same contract used both expressions for different obligations it would be assumed as a matter of interpretation that they must have been intended to impose a different standard.
On the subject of whether all reasonable endeavours would require a party to sacrifice its commercial interests to achieve the goal, in CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010] the judge, having reviewed the case law, stated: “It seems… that the obligation to use "all reasonable endeavours" does not always require the obligor to sacrifice his commercial interests”.
We have italicised the word "always" as suggesting that in some circumstances using all reasonable endeavours may indeed require a party to subordinate its own commercial interest. So to avoid this result, the promisor may prefer to use...
All reasonable but commercially prudent endeavours
This was in fact the formula adopted in CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010]. The judge found that the promisor could consider its own commercial interests alongside those of the other party but was required to take all reasonable steps to procure the planning permission, provided those steps were commercially prudent. When the promisor had to decide whether to take a certain course of action it was permitted to consider its own commercial interests but not its political interests, to the extent that they differed from its commercial interests. So if particular steps would assist with getting planning permission the promisor should take those steps if commercially prudent, even if they might work against the promisor's political interests.
Limitations
Even if the parties fail to specify the steps required, the court may be prepared to decide what the endeavours should comprise, if the outcome involves agreement of a third party or parties. In Yewbelle v London Green Developments [2007] an obligation to use all reasonable endeavours to obtain a s.106 agreement was held to be enforceable.
However, if the outcome depends on the parties themselves it is likely to be void for uncertainty. In London and Regional Investments v TBI [2002] “the vendor and purchaser shall use reasonable endeavours to agree the terms of a joint venture… having regard to the principles set out in the agreed form (attached)” was too uncertain to be enforceable. As was stated in Little v Courage [1995], “an undertaking to use one’s best endeavours to agree… is no different from an undertaking to agree (which is)… uncertain and incapable of giving rise to an enforceable obligation".
If the parties know what action is likely to be required to achieve an objective, the contract should spell out their responsibilities in that respect. For example:
- If litigation might reasonably be contemplated, parties should state whether that must be pursued, by whom, at whose expense and to what point.
- If a payment or a loss making activity might be required, parties should consider specifying the maximum payment or loss.
This leaves less scope for argument over the extent of the promisor's obligation.
Finally it is important to consider what should happen if the objective cannot be achieved despite the use of the specified standard of endeavours. Is it a condition which if not fulfilled will entitle one or both parties to rescind the contract, can one party or the other elect to waive the requirement and complete the contract or should completion be on different terms as to price or otherwise?
How can Burges Salmon help?
Our real estate development and real estate investment teams provide specialist advice to businesses and individuals on all aspects of developing and investing in UK real estate. If you would like to discuss anything in this article or any other real estate related matter, please speak to your usual contact at Burges Salmon or Ross Polkinghorne.
This article was written by Rose-Anna Higgins.