Blog by Joel Masterson: Endeavouring to understand what 'best endeavours' means in IP contracts

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