We’ve written earlier about the terms “reasonable endeavours” and “best endeavours” and what they might mean when used in contracts. If you missed that check it out here.
This time we’re going to discuss a recent case in which the courts looked closely at what these clauses actually mean in practice, and what this means for you if you are ever using clauses like this.
The case[i] revolved around an agreement for the sale of allocated places for aged care, in which a buyer was successful in arguing that it had the rights to withdraw from a $30m contract for the sale of an aged care facility, notwithstanding that it had promised to use “reasonable commercial endeavours” to do a number of things under the contract that it did not eventually do.
The term in the contract that required the buyer to use “reasonable commercial endeavours” related to actions that were required of the buyer to try to ensure various conditions of the contract were satisfied as quickly as possible. The conditions were never satisfied. The buyer later decided that it was not in its commercial interests to go ahead, and withdrew from the contract, leading to a dispute about whether the buyer had fulfilled its obligations under the contract. That is, whether indeed it had used “reasonable commercial endeavours” or whether its decision to pull out on the basis of its own commercial reasons meant that it had obviously not used “reasonable commercial endeavours” in fulfilling the obligations.
The case provided the following learnings:
- The inclusion of the word “commercial” can imply that some commercial steps need to be taken – and the inclusion of this word might therefore create a higher obligation than if this word hadn’t been included
- The words “reasonable commercial endeavours” mean that a party is obliged to take steps reasonably available to it to put it in a position to fulfil the obligation
- If the party does take steps, but is unable to fulfil the intended outcome of the clause, the clause does not require that the party go any further
What does this mean for you?
It can be easy to use this sort of wording as a fall back in your negotiations, when it is difficult to express what is required of a party. Or simply as a way to negotiate a mid way position between your perspective, and your contracting party.
But this case demonstrates exactly why wording like this is not an “easy way out” in the long run.
It is trite to say that you should put serious attention into finding more specific language in drafting clauses relating to obligations of the parties. However, if you must use a clause like this, then at the very least consider the following:
- How you would you establish whether or not this obligation has been fulfilled if there was an argument?
- What risks are there for your organisation if those obligations aren’t fulfilled in the way that you had intended?
- Can you include any specific detail about what reasonable endeavours actually means in this circumstance? And what steps the party/ies are required to take in order to satisfy the obligations?
- What should the consequences be if the obligations aren’t met?
- Consider including a requirement that the party act in good faith, without any other commercial motive.
If you would like assistance in reviewing or drafting a clause like this, contact us 02 8006 0830 or [email protected] for a confidential discussion.
[i] Cypjayne Pty Ltd v Babcock & Brown International Pty Ltd [2011] NSWCA 173
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