Endeavour Clauses vs Absolute Obligation Clauses

Contractual agreements often contain wording that imparts an express obligation on the parties such as “the Contractor shall” or the “the Project Manager shall” if one party is to do something specific or a broader obligation to deliver services and for the other party to receive payment. There are ramifications if either party does not meet their obligations.

When it comes to delivering the contract’s requirements, certain obligations can be imposed, including fitness for purpose, reasonable endeavours, and anything in between. Like most contracts, there are severity levels of such obligations imposed by one on the other through such wording.

It’s essential to understand the difference and what this means when you are preparing a contract for issue or have received a contract and wish to understand what ultimate obligations you are signing up to. For example, suppose you sign up to a design and build contract with an absolute fitness for purpose obligation. In that case, you may go above and beyond anything you have done before (and be deemed to have allowed to do so in your price) to meet the desired outcome. However, the tightness of the contract wording is critical in this instance, as those drafting the contract will need to ensure they are unambiguous. Getting a legal review of the drafting is paramount when imposing absolute obligations.

Absolute Obligations

The most onerous in terms of the party that has to meet them is deemed to go beyond a reasonable level of effort to achieve the outcome. They are deemed to do all required to achieve the outcome, e.g., their work will not be acknowledged as complete until they have reached the contract requirement in full. Essentially, fitness for purpose or a similarly worded best endeavours obligation that subsequently implies a duty of results on the contractor.

They are deemed to be held beyond the level of reasonable skill and care and instead have to go above and beyond to achieve the desired result. The term ‘best endeavours’ essentially means just that – the party must put in its best efforts to achieve the result, not what is considered reasonable, but their absolute best.

However, can they be held to anything, or is there a limit of the reason that can be applied?

It is widely accepted that the limit was established in the 1911 case of Sheffield District Railway vs Great Central Railway, where Sheffield District Railway sought to pursue the other party for breach of contract on the basis it did not consider they had used their best endeavours to develop their railway. The case reviewed the point of best endeavours to establish what would be construed as the limit, and the ruling was the level of effort could essentially not be at the cost of the business, i.e., you cannot be held to the point that you become insolvent, but equally, you should leave no stone unturned in efforts to deliver.

It’s an important point of difference between a fitness for purpose obligation or best endeavours. In reasonable endeavours, from an insurance perspective, you will be covered in the event of a failure to exercise reasonable skill and care, but not against a claim against fitness for purpose obligation. The party imposing this level of liability should consider whether

a) the party who takes on the contract will be able to get insurance for this level of cover and

b) if they do not and wish to pursue a breach of contract claim, they are financially sound enough to pay the claim as the alternative is liquidation, and the employer gets no compensation.

In the event of a dispute, the party who signed up to the fitness for purpose obligation often claims the unreasonableness of it all and sets out a case that it was simply unachievable and doomed to fail. Therefore, they cannot be held responsible because to achieve the desired outcome, they would need to go bankrupt and was therefore unreasonable and unenforceable.

All reasonable endeavours

Not to be confused with best or reasonable endeavours, the use of ‘all’ reasonable endeavours is often seen as halfway between the two. However, in attempting to find a middle ground, it is often seen as creating ambiguity. On the spectrum of obligations, it can be construed to fall towards best endeavours due to the use of the term ‘all’. Are you confused by this? It’s easy to see how the parties’ interpretations can be entirely different regarding the level of effort.

For this exact reason, it is often good to refer to case law, as in the case of Rhodia International Holdings Ltd vs Huntsman International LLC (2007) where it was decided by the Judge that an obligation to use best endeavours probably requires a party to take all the reasonable courses he can. In that context, it may well be that an obligation to use all reasonable endeavours equates with using best endeavours.

But the same principle of protecting commercial interests still applies here in the same way that best endeavours does, i.e., it would be unreasonable to expect, even with an ‘all’ reasonable endeavours clause for the obliger, to put the company at risk in attempting to deliver the contract.

However, being commercially unviable to continue meeting an ‘all reasonable endeavours’ or ‘best endeavours’ clause does not extend to operating a contract that was simply not commercially viable. Suppose the contract was a loss-making one due to actions taken by those who had delivered it. In that case, this is not a reason to claim that meeting obligations are the root cause for the losses and therefore the obliger was to be absolved of its responsibilities.

Reasonable Endeavours

The least onerous, taking reasonable endeavours, is widely accepted in legal obligation terms as the obliger needing to take one reasonable course of action having taken due consideration of the commercial interests at stake and the possibility of success if they are to demonstrate they have taken reasonable endeavours.

Another key difference between fitness for purpose, best endeavours and all reasonable endeavours is that when acting reasonably, the parties can take the view that they must not disadvantage themselves. However, the onus will be on the obliger to demonstrate this is the case, e.g., if they had taken specific steps, they would not have achieved the desired outcome and would have been commercially punitive as a result. This is how they can demonstrate they have used reasonable endeavours.

Drafting Contractual Obligations

Above, we have described in a broad sense the difference in scale of endeavours obligations to aid the understanding of the principles involved. However, when it comes to the drafting and subsequent administration of the contract, there are several things that you can do to remove ambiguity:

• If inserting a best endeavours clause, be mindful that whatever you are applying it, e.g., rate of progress, completing the works or achieving an outcome – you need to consider the sums required for the party to achieve this and whether in pursuing this it would be more than the contract sum and therefore deemed to be unenforceable. In some contracts, a cap has been set to limit the liability for attempting to deliver the best endeavours, but this is counterintuitive.
• If you are imposing an endeavours clause, then rather than leaving it open to interpretation as to what actions should be forthcoming to meet such a clause, consider describing what level of endeavours is expected to; these can include:
  • What cost, time and level of resource is expected to be deployed and does this have a monetary cap?
  • If the obliger wishes to challenge the obligation, how should they do this? Should this be via legal process or alternative dispute resolution proceedings?
• Suppose the obliger finds themselves under challenge and having to demonstrate they are indeed using best, all, or reasonable endeavours. How should they demonstrate this, and at that regularity should they be reporting it back at?
• Suppose progress is subject to an endeavours clause, and the obliger finds themselves in delay. Are they to write and explain the cause of delay and how they are treating it, including what steps they have put into place and how they consider this reasonable, etc.?
• If you intend to use a best endeavours clause, then writing words to the effect that “the contractor shall take all those steps in their power to produce the required results”, “the Contractor shall have used their best endeavours to fulfil the contract conditions by no later than”, ” the company must use its best endeavours to ensure that the conditions set out in clause [12] are fully discharged”, or words to that effect will be required.
• From the above, substitute ‘best’ for ‘reasonable’ or ‘all reasonable’ depending on the level you wish to impose.

Interesting Case Law

In the case of Jet2.com Limited v Blackpool Airport Limited (2012), it involved two ‘endeavours’ clauses which were 1) Blackpool Airport had an obligation to use it’s best endeavours to promote Jet2.com’s low-cost airline and also 2) all reasonable endeavours to provide a cost base that will facilitate Jet2.com’s low-cost pricing.

The dispute arose regarding whether Blackpool Airport had an obligation to deal with Jet2’s flights arriving outside the regular operating hours of the airport, which were 7 am to 9 pm. Blackpool Airport claimed it was highly cost-inefficient to operate outside of regular hours to accommodate Jet2’s flights, albeit it had done so for the first four years of a fifteen-year contract. Having decided that it could no longer operate at a loss in these situations, Blackpool Airport served a seven-day notice onto Jet2, informing them it would no longer accept flights outside of what it deemed to be regular hours.

What followed was Jet2.com Limited having to divert flights to Manchester Airport, causing considerable disruption to its flights and for its passengers, not to mention the additional expense. Jet2 raised a dispute on the basis that Blackpool Airport was in breach of contract, who then appealed on the basis that the wording in the contract referred to co-operating together and to use “their” best endeavours, and that by operating so consistently out of hours, if forced to do so, it would have affected their commercial interests and therefore the clause was unenforceable.

However, the court of appeal upheld the decision that Blackpool Airport was in breach of contract. It was noted that whilst it was responsible for upholding the agreement to work with Jet2 and its business model of a low-cost base, it was not equally accountable for opening out of hours, incurring losses, and supporting a failing business. However, through conduct, it had opened out of hours for four years and this was regarded as the status quo.

Photo by Joshua Hoehne on Unsplash

About Dean Suttling

A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.