A recent decision in the High Court suggests that the courts are becoming more willing to bind parties to their promise to use “all reasonable endeavours” by giving legal effect to its own interpretation as to what the parties agreed.
This reading into the commercial background, with any determination being at the discretion of the courts, means that greater emphasis needs to be placed on defining each party’s obligations when negotiating endeavours clauses. But what are the options available when drafting these clauses?
Endeavours clauses: the options
Case law in this area has centred around three types of endeavours clauses; “best endeavours”, “reasonable endeavours” and “all reasonable endeavours”.
Taking these in turn, “best endeavours” obliges a party, having identified the reasonable steps that could be taken in the particular circumstances, to exhaust all of those options in order to satisfy the obligation. This means that the obligor could be required to act outside of its own commercial interests under such a clause, though it should be noted that the concept would not extend to requiring that party to take steps that would cause serious detriment.
“Reasonable endeavours”, on the other hand, is seen as being significantly less onerous. Here, the obligor is able to consider the commercial implications of complying with their duty, such as the cost of compliance, the practicalities of the proposed actions and the likelihood of success. More importantly, however, a “reasonable endeavours” obligation does not require the obligor to take any steps that would be outside of their commercial interests or that would disadvantage them.
The final endeavours obligation is “all reasonable endeavours”, with the courts holding this to be a middle ground of sorts between “best endeavours” and “reasonable endeavours”. However, there is a lack of clarity compared to the other more established endeavours clauses, with judges in certain instances requiring the obligor to act against its own commercial interests – a requirement more typically associated with “best endeavours” obligations. In the recent case, the court found that the defendant had breached an “all reasonable endeavours” clause by raising funds through a round of equity fundraising rather than by securing senior debt financing as was required under the agreement. This was despite the fact that securing senior debt financing would trigger payment of deferred consideration and so would be more costly to the defendant.
A better way?
Because of these issues, parties should look to define their obligations in the contract as clearly as possible. This can be done in two ways: the meaning of “best” or “reasonable endeavours” can be expressed in terms of the level of effort required; or, alternatively (and perhaps preferably), the specific steps that an obligor is required to take to meet the particular obligation can be set out.
Whichever approach is chosen, it is evident that the uncertainties of endeavours clauses should be specifically addressed as far as possible. As the case law continues to develop in this area, it is quickly becoming clear that when it comes to drafting, the devil really is in the detail.
This blog was written by Matthew Flint. For further information, please contact:
Sophie Brookes, partner, Corporate
T: 0161 836 7823