M&A+ Endeavours
What exactly does it mean in contract for a party to use reasonable endeavours to achieve an outcome? What, for that matter, does all reasonable endeavours entail? And does best endeavours ratchet up the level of effort even further?
Unfortunately, the answers to these questions are not straightforward (at least not in the Australian context). But this does not stop parties signing up to these types of qualified obligations in the belief – perhaps mistaken – that they are soft commitments with little (if any) consequence for failure to deliver the intended outcome.
In this short note, we sound a word of warning and provide some practical tips for contract drafters and negotiators. Read on.
How much effort does a party have to put in to satisfy a qualified obligation?
The position under Australian law is less well defined than under UK law and elsewhere. But given the influence (if not precedent value) of UK judgements, the UK position should not be ignored.
Australia
In Australia, there are few guiding principles to assist with a practical distinction between each level of effort required. In addition to the usual rules of construction, Australian courts have found that unless otherwise agreed, a party is not expected to neglect its own commercial interests in seeking to perform a qualified obligation.[1] In other words, you don’t need to keep spinning wheels and spending money to demonstrate that you’ve tried hard enough.
Whenever Australian cases have hinted at a distinction, they have pulled up frustratingly short. For instance, in Hoho Property Pty Ltd v Bass Finance No 37 Pty Ltd,[2] Justice Rees in the NSW Supreme Court noted that while ‘the obligation to use “best endeavours” is more onerous than “reasonable endeavours”’, ‘the obligation is still informed by notions of reasonableness’. Referring to an earlier case (Transfield Pty Ltd v Arlo International Ltd[3]), the judge explained that the standard required for best endeavours was ‘a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity and qualifications of the obligor viewed in the light of the particular contract’.
So, aside from what the parties could have been expected to have in mind when they entered into the contract, reading meaning into a reasonable or best endeavours undertaking will be largely circumstantial.
UK
In the UK, the distinction is somewhat clearer.
- Reasonable endeavours typically requires a party to take one reasonable course of action to fulfil the obligation. If that path is reasonable, the party has satisfied its duty.
- All reasonable endeavours, on the other hand, requires a party to exhaust all reasonable options available to them. This means considering multiple avenues and pursuing each reasonable path available to achieve the required outcome. While not as demanding as best endeavours, this standard is often more onerous than reasonable endeavours, as parties are expected to do more to meet their obligation.[4]
- The best endeavours standard has been interpreted similarly to all reasonable endeavours, but can sometimes require greater sacrifice on the part of the promising party, potentially even at the cost of commercial interests.[5]
While this doesn’t represent the current law in Australia, it is informative to look at how the common law has developed in the UK. The law does not stand still and will evolve to reflect commercial practice and community expectations. Judges will look at other influential jurisdictions (and markets) in deciding in which direction to take precedent.
So, what does this mean in practice?
Before agreeing to any form of endeavours obligation, a party should ask:
- Can my company realistically meet this obligation? If you aren’t confident that you can deliver today or within the timeframe stipulated, then think about what you can do given the resources available to you. Rather than accept a ‘best efforts’ obligation where you are resource constrained, consider agreeing to a specific list of more modest steps aiming towards the other party’s desired outcome. More on that below.
- What’s the true cost of endeavouring? Consider the time, resources and potential commercial risks involved. If the clause requires all reasonable endeavours or best endeavours, you might need to allocate more resources than expected to avoid any suggestion that you’re just not trying hard enough.
- What happens if you do not get there despite your best endeavours? Well, someone is likely to be really annoyed!
In practice, parties can include guard-rails in contracts. For example:
- Agree on specific steps that are to be taken towards a particular result, such as issuing correspondence or submitting applications within particular timeframes; who is responsible for follow-ups, how and how often; define steps to escalate when things do not go as planned, etc.
- Define clear limits.
A clause or the contract generally might also specify what a party is not expected to do to satisfy a qualified obligation.
For example, in addition to the very standard qualification that a party is not obliged to do anything that is not reasonably within its power and control, other restrictions might include not having to pay over amounts to a third person as an inducement for providing their consent, not incurring material unbudgeted expenditure, and not doing anything which is likely to involve diversion of resources or which is contrary to the party’s commercial interests.
We commonly see provisions such as these in contract interpretation clauses and they are undoubtedly in response to developments in jurisdictions where the legal principles have been litigated and fleshed out.
[1]Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640 and Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234.
[2] [2023] NSWSC 411 referencing Refshauge J in the 2013 ACT case of Stepping Stones Child Care Centre (ACT) Pty Ltd v Early Learning Services Ltd [2013] ACTSC 173.
[3] [1980] HCA 15.
[4] Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd [2021] EWHC 3015 (Ch).
[5] Rhodia International Holdings Limited v Huntsman International LLC [2007] EWHC 292 (Comm).
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