Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children "It doesn't get easier, it just changes", so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.
With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business's life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.
We've already discussed various topics, such as, set up, directors, funding, employment and shareholder-related matters, but now let's concentrate on Commercial Contracts.
Endeavours clauses
An endeavours clause is a provision in a contract that requires a party to use a certain level of effort to try and achieve a specified result. These clauses are commonly used when a party is willing to attempt to fulfil an obligation without committing to do so absolutely. There are several "levels" of endeavours clauses, each of which require different amounts of effort, such that it can be unclear as to how far a party must go to try and meet the obligation.
Failure to fulfil an enforceable endeavours clause constitutes a breach of contract, which can have various repercussions, including your being liable to pay damages to the other party and termination. As such, it is crucial that you have a clear understanding of the scope of any endeavours clause before agreeing to it.
Levels of endeavours clauses
There are three "standard" endeavours clauses ("best endeavours", "reasonable endeavours" and "all reasonable endeavours"). For two of these, case law has resulted in a fairly clear understanding of what will be required from the endeavouring party (the obligor). Accordingly, the extent of a party's obligations will depend on the agreed wording of the clause.
Best endeavours
A best endeavours clause (for example, "The Company shall use best endeavours to deliver the Goods to the Buyer within the timescales set out in clause 9") imposes the most onerous standard on the obligor.
Whilst not an absolute obligation, the starting point is that a best endeavours clause "means what the words say; they do not mean second-best endeavours" (Sheffield District Railway Co v Great Central Railway Co).
Essentially, the obligor must put itself in the shoes of the person to whom the obligation is owed (the obligee). Therefore, by agreeing to a best endeavours clause you commit to doing everything possible to achieve the desired result, even if it means sacrificing your own commercial interests and incurring significant costs. For example, in a case between Jet2.com and Blackpool Airport, the Court of Appeal held that the airport was obliged to open outside of its usual operating hours to accommodate Jet2's flight times. By agreeing to use best endeavours to promote the budget airline's flights, the airport had inadvertently agreed to open during night-time hours, regardless of the inconvenience and financial cost involved.
If you are the obligor, we recommend that you take legal advice before agreeing to use "best endeavours" but, at the very least, you should think extremely carefully about the steps that such a clause will require you to take (and the cost and practicalities of these).
Reasonable endeavours
"Reasonable endeavours" (for example, "The Purchaser shall use reasonable endeavours to obtain the necessary approvals, consents and licences by 20 April 2024") is the least burdensome of the three standard clauses, but even so, it should not be agreed to lightly.
Case law has determined that the standard imposed by a requirement to use "reasonable endeavours" is a question of "what would a reasonable and prudent person acting properly in their own commercial interest... have done to try" to achieve the objective (Minerva (Wandsworth) Ltd v Greenland Ram (London) Ltd). This implies an objective approach based on the reasonable obligor, not the obligee as is the case for "best endeavours".
The courts have considered the obligations behind a "reasonable endeavours" clause in minute detail. Crucially, the obligor is not typically required to sacrifice its own commercial interests and may be entitled to consider the impact on its profitability. In addition, the likelihood of achieving the desired result should be considered and once the obligor has taken all reasonable steps to achieve the objective, it is not required to continue trying.
Although less demanding than a "best endeavours" clause, this obligation is still significant and will form an enforceable commitment that may be challenging to meet. In particular, any attempt to manipulate circumstances to avoid fulfilling the obligation will likely constitute a breach.
All reasonable endeavours
The third commonly used endeavours clause is "all reasonable endeavours" (for example, "The Contractor shall use all reasonable endeavours to complete the Project by the Long Stop Date"). Whilst such clauses are commonly seen as a compromise between best and reasonable endeavours, this is not necessarily the case, and their meaning is controversial.
The courts have indicated, without deciding the point, that it is "probably a middle position somewhere between" reasonable endeavours and best endeavours. However, it has also been suggested that in meeting an all reasonable endeavours obligation, an obligor would be required to take all reasonable courses of action, thereby sacrificing its own commercial interests to comply with the obligation.
The current stance is that a court will interpret it based on the context of the contract and the parties involved. This obviously results in uncertainty as to what an obligor will actually be required to do in practice to comply with such a clause. As such, obligors should be cautious when agreeing to an all reasonable endeavours clause; it would be prudent to consider such a clause to be equally as burdensome as a best endeavours clause and to take legal advice before agreeing to such wording.
Alternative options
Over time, variations of the three most commonly used endeavours clauses have come into being. You may see phrases such as "commercially reasonable endeavours" and "all reasonable but commercially prudent endeavours", which are used to try and soften a reasonable endeavours obligation. However, case law on these terms is inconclusive, making it unclear how the courts might differentiate between them. Consequently, including such clauses in a contract is risky and may result in uncertainty regarding the parties' obligations. As such, it is advisable to avoid using these variations.
It is also relatively common to see terms such as "best efforts" instead of "best endeavours" and "all reasonable steps" instead of "all reasonable endeavours". Although the courts are likely to treat these as interchangeable phrases, we suggest sticking to the tried and tested "endeavours" wording.
Practical takeaways
- Ideally, any endeavours clause should clearly outline the steps a party must take to fulfil its obligations. For example, if one party needs to spend money to achieve the result, the contract should specify this and include the maximum amount to be spent. Similarly, if a party is required to speak to certain people within a set timeframe, the contract should list who these people are, what needs to be discussed and include a deadline for the discussions
- Draft any endeavours clauses very carefully and seek legal advice if you are unsure about the requirements and the extent of your obligations. Failing to meet an endeavours clause may result in your being in breach of contract
- Limit yourself to "reasonable endeavours" or "best endeavours". Avoid using vague or diluted language as it can create uncertainty and, if the matter goes to court, you might discover that your obligations are more burdensome than you had anticipated
- If you are the obligor, maintain an accurate record of the steps taken towards satisfying your obligations. Such evidence could be extremely helpful to you if a dispute arises
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.