What is required to satisfy ‘reasonable endeavours’ and ‘best endeavours’ clauses in commercial contracts?

What is required to satisfy ‘reasonable endeavours’ and ‘best endeavours’ clauses in commercial contracts?

Many commercial contracts contain provisions require one or other party to use “reasonable endeavours” or “best endeavours” to achieve a particular result.

An obligation to use reasonable endeavours is often considered to be more flexible and with best endeavours requiring a higher standard of performance. However, when looking at the meaning of the clause in a particular contract there is probably very little difference between reasonable endeavours and best endeavours.

The question of what a party has to do to satisfy either a reasonable endeavours or best endeavours clause largely depends upon what the parties wish to achieve in the contract.

A recent decision Victorian Supreme Court provided some guidelines in relation to how these types of clauses are to be interpreted. In that case there was a reasonable endeavours clause used in a deed of settlement of a dispute. The deed required the parties to use reasonable endeavours to give effect to the deed of settlement. Part of the obligations under the deed were for the parties to cooperate in the sale of a property.

In that case the Court held that the purpose of the reasonable endeavours clause was to make as an express provision of the deed, the legal principle that parties must cooperate in the performance of a contract and do all things reasonably necessary to bring about performance of the contract.

The Court found that:

• what amounts to reasonable endeavours is defined by the obligation that the reasonable endeavours clause supports – in that case it was to sell the property;

• while there may be some distinction between reasonable endeavours and best endeavours the use of the term reasonable, rather than best, does not give rise to any suggestion that the parties have some discretion to not perform their obligations under the contract. The steps required however must be essential to performance of the contract;

• the steps required in that case were those steps necessary to give effect to the obligation to sell the property including engaging a real estate agent, setting a listing price and a reserve price, instructing a lawyer and once the property was sold, to sign the contract and transfer to enable the sale of the property to be completed. Nothing more or less was required by the deed.

• a reasonable endeavours clause does not impose any obligations independent of the other obligations in the contract;

• the duty imposed by the reasonable endeavours clause carries with it also a further obligation not to hamper the performance of the contract.

In that case the defendant’s conduct in refusing to sign a sale authority to engage an agent or to nominate an alternative agent was found to be a breach of the reasonable endeavours clause and therefore a breach of the terms of the deed.

The take from this case is that in order for a reasonable or best endeavours clause to be effective the contract must be careful in specifying with clarity and certainty the object of the endeavours and by what objective means the question of whether the party has used reasonable or best endeavours can be measured. Specifying the obligations will result in the clause being far more effective and will leave less to be left to a Court to decide.

Should you wish to discuss your upcoming commercial contracts please contact our Commercial Team at Solari and Stock Miranda on 8525 2700 or click here to request an appointment.

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