March 23, 2017
All the time I see contracts that require one party to use reasonable or best endeavours to achieve a result. Basically, when the outcome is not something over which either of both parties have total control, rather than impose an obligation to ensure that the outcome is achieved, the contract sets out that they must endeavour to get to the agreed goal. How hard you have to try depends on the wording.
- Reasonable endeavours. You have to give it a go. Would an ordinary person say what you have done was reasonable?
- Best endeavours. You must leave no stone unturned.
- All reasonable endeavours/reasonably commercial endeavours. Between the first two.
Commercial contracts are what they say they are: the setting out of what the parties says they will give to each other, when and how. Where I come in is when it does not go according to plan. Sometimes the contract covers the point but very often it does not so the party who feels aggrieved tries to find a way around the hole. I see a lot of misconception about what contractual obligations require such as a duty to act in good faith (no) and the implication of terms (sometimes but tricky). Recently the High Court took the opportunity to give some clarification.
The case was about the sale of a dormant mine. The buyer needed money to start mining again. The lion’s share of the purchase price was only payable if the buyer got a senior debt facility. Its obligation was to use “all reasonable endeavours”. The buyer tried and failed to get a facility but raised funds from an inter-company loan within the group. The seller said “You have raised the money so pay me”. The buyer said it was not a senior debt facility so the condition precedent to triggering the payment had not happened.
Needless to say, the contract had not provided for what the seller really wanted which was for the price to be paid if the mine started working. So, it tried to wriggle out of the bad deal it had done. It argued that:
- because the condition precedent no longer had a useful purpose (i.e. a facility was no longer required), it could be disregarded. The buyer invented the phrase “principle of futility”. Wrong said the Judge, there is no such concept.
- the requirement to use all reasonable endeavours only applies if the test for what is reasonable effort is spelled out clearly. So, the failure to secure a facility was a breach. Wrong again, said the Judge. The Judge’s job is to interpret what the parties have agreed. Even if the parties have made it difficult for him to do so in this case by bad drafting.
- The buyer was contractually obliged to act in good faith. Wrong for the third time, said the Judge. English law does not impose such a term. If you want it, draft it in.
So it was a slam dunk for the buyer. A working mine without paying for it. Result.
So, what do we get from this?
A requirement to use all reasonable endeavours lets the performing party off the hook if they have done as much as they can to achieve the agreed goal. If they had done nothing and gone straight to the intercompany loan, there may have been a difference outcome. And they do not have to act in good faith.
Clearly the sellers did not think through carefully what they wanted to achieve. They could have drafted in terms
- to trigger the payment when the mine was in a position to start working
- that the buyers would act in good faith.
The obligation to use all reasonable endeavours would normally mean that a term of good faith would not be needed so they should have though more about what sort of effort was required.
Then I started thinking “Can they sue their lawyers who drafted it…”. Happy days.