Navigating Contractual Commitment: Unveiling Effort Levels and Qualifying Phrases in Legal Obligations
It is quite common to find wording in commercial contracts that seeks to “water down” an absolute requirement to do something to a qualified level of effort, with phrases such as ‘reasonable endeavours’ or ‘best efforts’ all too familiar to those negotiating contracts. It is, of course, important to understand the implications of including such phrases in a contract with regard to the law of the jurisdiction that will govern the contract. But what happens if the contract is governed by the laws of a jurisdiction that you are not familiar with? Can you assume that phrases in the contract qualifying requirements and obligations will have the same (or substantially similar) meaning to that that you are used to working with?
The short answer to this question is: ‘no’. Although there is some commonality between the interpretation of ‘reasonable endeavours’, ‘best efforts’, etc. requirements around the world, there are significant nuances in the ways that the laws and judicial decisions of different jurisdictions apply to these concepts. In this blog post we discuss points of note in relation to some specific jurisdictions that highlight some significant differences between how common and civil law jurisdictions interpret these concepts. For the tech sector, with its obligation-heavy services agreements and arrangements that are often international in scope, being aware of such differences is particularly important to those seeking to agree a new contract.
Focusing firstly on Australia as an example of a common law jurisdiction using such concepts, it is customary to see contractual obligations and commitments that are not absolute, but rather that are conditioned by including language that requires a certain standard of effort to be applied in seeking to achieve a particular outcome. This approach reflects the fact that, in practice, there are some outcomes that are not within a party’s control. ‘Absolute’ obligations are those commitments that are breached if the outcome is not achieved, so it is a binary assessment (and outcome) as to whether or not an absolute obligation is complied with. In contracts governed by Australian law it is common to see a range of different efforts or endeavours standards, including ‘best efforts’, ‘reasonable efforts’, ‘commercially reasonable efforts, ‘commercial best efforts’ and ‘all reasonable efforts’, to name but a few.
To date, the Australian courts have generally interpreted ‘best efforts’, ‘all reasonable efforts’ and ‘reasonable efforts’ as meaning materially the same. The courts have also recognised that, where an obligation is conditioned by the phrase ‘reasonable endeavours’, then the nature and extent of the obligation is necessarily conditioned by what is reasonable in the circumstances, which may include the parties’ business interests – it does not require the obligated party to put the other party’s interests ahead of its own. Furthermore, contracts may include their own internal standard of what is reasonable, including by some express reference relevant to business interests. For this reason, we often see contracts that are governed by Australian law specify language that seeks to define the relevant standard of performance by reference to economic, commercial and/or operational factors.
Although English law is also built upon a common law system (that other common law systems ultimately derive from), the way in which the English and Australian judiciary treat statements that qualify the level of effort required by a party in contracts has diversified to a certain extent over the years. Such concepts were explored by the English High Court in the case of Brooke Homes (Bicester) Limited v Portfolio Property Partners Limited and Others  EWCH 3015 (Ch), which specified an ‘all reasonable endeavours’ requirement to enter into a conditional sale agreement in a contract for the development of land. The conditional sale agreement was not entered into, leading the court to scrutinise the level of effort required to discharge the qualified requirement. The case provides the following useful guidance:
- Reasonable endeavours might mean that if one reasonable path is taken then the obligation
- ‘All reasonable endeavours’ is normally interpreted as requiring all reasonable paths or actions to be exhausted.
- The judge noted that there may be little difference between a duty to use ‘all reasonable endeavours’ or ‘best endeavours’, although ‘best endeavours’ may require the sacrifice of commercial interests and ‘all reasonable endeavours’ may be less likely to require this.
- It was also noted, however, that the exact level of effort required is context-dependent, so it could be possible for some sacrifice of commercial interests to be necessary if an ‘all reasonable endeavours’ clause is included in a contract.
From an English law perspective, it is important to only use terms that qualify the level of effort required in relation to a party’s obligation where there is no other way of phrasing the obligation, as these terms are uncertain and can be subjective. If the use of such terms cannot be avoided, then there is a need to try and create some certainty through specifying a minimum set of expectations in the contract. In a contract between a technology service provider (TSP) and customer, rather than specifying that the supplier will use e.g. ‘all reasonable endeavours’ to provide the services, specifying the exact standards of service that should be met could potentially overcome the risk of uncertainty in the contract as to the required level of effort. Requiring the supplier to provide the services in line with e.g. ‘Good Industry Standards’ and then defining such standards as precisely as possibly, including with reference to the particular industry in which the supplier operates, may be a sensible approach.
In civil law jurisdictions, is there a similar approach to the use of qualified efforts wording in contracts? Taking Spain as an example, the most accurate answer in relation to that jurisdiction is probably: ‘no’, as the concept has not yet been transposed into Spanish law. Although there is some academic discussion that the concept is starting to creep into the interpretation of contracts governed by Spanish law, the majority position is still that this is not the case. The current view of the Spanish courts suggests that the use of ‘best efforts’ by a party arises in relation to a moral or social duty rather than an enforceable legal obligation. The binding force of the obligation would arise not from the ‘best efforts’ wording, but rather from fact that the party felt legally obliged to attend and so did (the so-called “natural obligation”). This explains why such “obligations” would not be enforceable but, on the other hand, if already performed, the courts could not oblige the other party to return the deliverable or revert something to the prior situation as the performing party thought that they were performing a “natural obligation”. Of course, collecting some evidence that the “obliged” party tried to a certain extent to comply would be wise in order to mitigate the accusation of acting bad faith, but otherwise the position of such party would be relatively comfortable.
The above examples indicate that the way ‘best efforts’, ‘reasonable endeavours’ and similar concepts are treated by different legal regimes around the world varies considerably, and care must therefore be taken to ensure that when entering into a contract governed by a particular jurisdiction that you are mindful of the nuances applicable to that jurisdiction if one or more statements qualifying the level of effort to be used by a party are specified. Care must also be taken to ensure that the contract you are entering into is clear as to the exact level of service being provided, with reference to the specific level of service expected within the sector or sub-sector in which the TSP operates, if applicable.
For more discussion regarding how this issue may impact the strength of contractual obligations, and of other issues such as the impact of other concepts such as ‘good faith’ obligations, please listen to our recent podcast: ‘How using drafting terms like ‘reasonable endeavours’ impacts the enforceability of contracts’ that forms part of DLA Piper’s Better Contracts podcast series.