Ever found yourself negotiating a
contract in which the other side wanted to water down an obligation
by inserting the words "best endeavours"? Ever wondered what
that actually means and how it would play out if push came to
shove? This article provides lawyers with some handy caselaw
references from Australia and the UK that will hopefully help make
sense of the situation.
To cut to the chase, it basically means
that the obligation is not absolute (which is to be expected) and
that it requires the party with the obligation to take reasonable
steps, having regard to the circumstances, to meet the
obligation. And in particular, it will let that party off the
hook in circumstances where meeting the obligation would cause its
own financial ruin and potentially, even where that would cause a
financial loss.
The High Court of Australia has also
supported the view that "best endeavours (or efforts)" and
"reasonable endeavours" clauses impose substantially similar
obligations.
The caselaw has not typically arisen in
IP-related disputes but in a recent Australian High Court case, the
court recognised that best endeavours obligations "are not uncommon
in distribution agreements [and] intellectual property licences".
While there is limited judicial consideration of "best
endeavours" and "reasonable endeavours" clauses in the context of
intellectual property licences, the relatively extensive
consideration given to other commercial contracts and licences is
likely to be transferable.
Caselaw Chronology
Shepard v Felt &
Textiles of Australia Ltd (1931) 45 CLR
359
In this old case, the High
Court of Australia clarified that a "best endeavours" clause means
that the defendant is under an obligation "not to hinder or prevent
the fulfilment of the purpose of the clause." An example of this
arose in the case of Transfield Pty Ltd v Arlo International
Ltd (1980) 144 CLR 83 where the defendant had to use his "best
endeavours" to sell Arlo poles. The Court implied in that the
clause meant that he was prohibited from selling poles in direct
competition with the Arlo poles.
B
Davis Ltd v Tooth and Co Ltd (1937) 4 All ER
118
In this decision, appealed to the Privy
Council from the Full Court of the Supreme Court of New South
Wales, the plaintiff, who had the sole export agency for a certain
brand of whisky in Australasia, contracted the defendant to become
the sole agent in New South Wales for the sale of that whisky. It
was held that an obligation under a best endeavours or reasonable
endeavours clause to "vigorously to promote the sale of the whisky"
was construed by reference what a reasonable person should do in
the particular situation, at the relevant time and after
considering all the circumstances.
Terrell v Mabie Todd &
Co Ltd (1952) 69 RPC 234
In this decision of the High
Court of England and Wales, the standard imposed on a corporate
party having the obligation was that of a "reasonable and prudent
board of directors acting properly in the interests of the
company". The Court held that a reasonable endeavours clause could
not be enforced against the party having the obligation in
circumstances where it would result in the "certain ruin of the
company or [with] utter disregard of the interests of the
shareholders". It was further observed that an obligee's freedom to
act in its own business interests is not necessarily to be
sacrificed, by an obligation to use reasonable endeavours to
achieve a contractual object.
IBM United Kingdom Ltd v
Rockware Glass Ltd (1980) FSR
335
In this decision of the Court
of Appeal of England and Wales, a best or reasonable endeavours
clause was held to impose a duty "to do all in the obligor's power
but within the limits of what is reasonable in the
circumstances."
Hospital Products v United
States Surgical Corporation (1984) 156 CLR
41
In this landmark High Court of
Australia case, the court held that the phrase "best endeavours"
does not create an unfettered obligation. Gibbs CJ found
that:
"…an obligation
to use 'best endeavours' does not require the person who undertakes
the obligation to go beyond the bounds of reason; he is required to
do all he reasonably can in the circumstances to achieve the
contractual object, but no more."
In the same case, Dawson J also found
that the existence of a "best endeavours" clause does not impose a
duty upon the party with the obligation to disregard his own
interests.
Jet2.com
Limited v Blackpool
Airport Limited [2012] 2 All ER (Comm)
1053
In this comparatively recent case of
the England and Wales Court of Appeal, the parties had a fifteen
year contract which included an "all reasonable endeavours"
obligation on Blackpool Airport to provide a "low-cost base" for
Jet2. Four years into the contract, Blackpool Airport prevented
Jet2 from operating flights outside of normal hours. The additional
hours were agreed to be essential to Jet2's low-cost business
model. The Court held that the "all reasonable endeavours"
obligation was capable of requiring Blackpool Airport to remain
open outside its normal business hours, even if this would result
in a financial loss. This contradicts the prior authorities and
shows that under a best endeavours clause, an obligee may in be
required to incur some expense and even act contrary to its own
commercial interests.
Electricity Generation
Corporation v Woodside Energy Ltd
[2014] HCA 7
In this recent case, the High
Court of Australia considered a situation in which a party to a
long-term agreement had an obligation to use "reasonable
endeavours" to make supplemental gas available for supply at a
certain price. It was unclear whether the supplier breached this
obligation by demanding a higher price while there was a temporary
shortage in the supply of that product in the market because of an
explosion at a production facility. The 4:1 majority found in
favour of the suppliers, holding that the contract did not oblige
the suppliers to meet the obligation when a change in business
conditions led to a conflict between the suppliers' business
interests and the recipient's interest in obtaining the
supplemental gas at the contract price.
The majority noted that a reasonable
endeavours obligation would not require the promisor to achieve a
contractual object if this would cause "the certain ruin of the
Company." The recipient also conceded during the appeal
hearing that the promisor would not have been required to achieve
the contractual object if they would have been forced to do so at a
loss.
Conclusion
The judicial position appears to be
that a general obligation to use "best endeavours (or efforts)" and
"reasonable endeavours" may be too weak to make an obligation
binding if commercialisation to the "best advantage" of both
parties does not occur. For this reason, terms such as "must" or
"shall" will confer a stronger position for the licence giver.
On the other hand, these types of
clauses can be useful negotiating tools, for example, where a
contracting party wants to avoid taking on an absolute obligation,
but is instead prepared to give a less onerous undertaking.
Authored by Joel Masterson and
Jennifer Amy