Commercial Contracts, the Law and Your Obligations

Tuesday, July 24th, 2012

How obliged am I?

In every contract, one must set out the respective obligations of the parties. In addition to this, it is sometimes appropriate to place a particular level of obligation on a party if one wishes to achieve a certain standard or outcome from the obligation placed on that party. Likewise, one party might seek to qualify the extent of the obligations they agree to undertake to protect the extent of their exposure.

Whether you want to qualify the extent of your own obligations or increase the exposure of the other party in relation to certain obligations, the drafting is key in meeting a party’s expectations. However, parties remain at risk as to scope as there exists a wide spectrum of standards and recent case law continues to reveal that the law is not entirely certain.
It is generally thought that these so-called obligations can be placed on a sliding scale so before we move on, why don’t you have a go at placing the following randomly placed customary phrases in order starting with the strongest and most onerous level of obligation first (suggested answer below):

Shall; Best Endeavours; All Reasonably but Commercially Prudent Endeavours; Will; Must; May; Reasonable Endeavours; All Reasonable Endeavours; Commercially Reasonable Endeavours.

A recent 2011 case of Ltd v Blackpool Airport Ltd at the Court of Appeal felt the need to identify the outcome at which the endeavours clause was directed i.e. were the parties sufficiently clear in what they were trying to achieve and how could that be measured? Without sufficient clarity on those points, the entire clause would have failed for uncertainty. Although it has often been the case that ‘best endeavours’ would be graded the most onerous, ‘reasonable endeavours’ the least onerous, and ‘all reasonable endeavours’ covering the middle ground, this case tended to treat ‘best endeavours’ and ‘all reasonable endeavours’ as the same.

To obscure things even further, in a case CPC v Qatari Diar [2010], the newer invention of ‘all reasonably but commercially prudent endeavours’ was intimated to land somewhere in-between ‘reasonable endeavours’ and ‘all reasonable endeavours’. It was further highlighted in this case that if one were under an ‘all reasonable endeavours’ obligation, one would not always be expected to sacrifice their commercial interests to satisfy such obligation, whereas, the Jet2 case intimated that yes, they would. It has also been expressed that ‘all reasonable endeavours’ is an objective standard which would bring it closer to ‘reasonable endeavours’ than ‘best endeavours’ on the sliding scale.

Although the outcomes of the cases themselves fail to provide a clear and consistent pattern, what is clear is that the cases appear to be very fact-driven and therefore, in practice, what each obligation will actually require depends on the other provisions in the contract and the surrounding commercial context. It has been expressed that as the waters are so muddied, it is probably best to avoid ‘all reasonable endeavours’ at the present time.

Ultimately, it is important to understand that as with any contractual term, clarity is important. If the aim of an endeavours clause, or the criteria by which it can be measured, are not sufficiently certain, it may not be enforceable. The underlying objective of an endeavours obligation should be defined and drafted precisely so it can be clearly understood. You should consider the expectations of the parties in relation to the obligation and make express provision for it in the contract. Some questions to ask include: Should that party incur expenditure? Should they be required to sacrifice their commercial interests? Should it be measures subjectively or objectively? Should they have to pursue one or many or all courses of action to achieve the standard of the obligation?

Please contact Hanne & Co who can help you achieve the standard/s and outcome that you want. This level of detail at the drafting stage should create greater certainty for the parties and avoid costly disputes. Hanne & Co are a London law firm with a specialism in commercial law and contracts. The firm is able to offer competitive quotes across a wide range of commercial services. Please see our home page for our new Live Chat facility or our Twitter for latest updates.

(Suggested answer: The suggested sliding scale starting from the most onerous is: Must; Will; Shall; Best Endeavours; All Reasonable Endeavours; All Reasonably but Commercially Prudent Endeavours; Commercially Reasonable Endeavours; Reasonable Endeavours; May).

By Commercial Consultant Yvonne Morris.