Martin Reynolds of Barrett & Co in Reading explains the legal term “conditional contract” and the big difference between “best endeavours” and “reasonable endeavours”
- What is a conditional contract?
- What are the differences between Reasonable Endeavours, Best Endeavours and All Reasonable Endeavours?
A contract for the purchase of development land will frequently be what is referred to as a “conditional contract” – this means a contract in which completion will only take place once “satisfactory” planning permission (i.e. planning permission for the required number of houses) has been obtained.
In a conditional contract the buyer/developer will frequently take on an obligation to try to obtain satisfactory planning permission even though buyer and seller both know that whether or not such permission is granted is, in the end, beyond the buyer/developer’s control
Similarly the persons setting up a faith school may wish to take steps to maintain the particular faith-environment of the school. This can be done by imposing, in the Articles of Association of the charitable company through which the school is run, an obligation on the governor/directors of the school to try to find persons of a particular religious persuasion to fill senior roles in the school – notwithstanding the acceptance that, on any specific occasion, there may not be a suitable candidate of the required faith available.
But if a party agrees to “try” to produce a certain outcome how hard do they have to try, how many times and for how long?
Differing levels of obligation are reflected in the documents embodying agreements of this type by legal formulae known as “endeavours obligations”:
- Agreement to use “reasonable endeavours”;
- Agreement to use “best endeavours”; and the hybrid
- Agreement to use “all reasonable endeavours.”
Looking, then, at the precise requirements imposed by each type of clause:
A party subject to a reasonable endeavours clause is judged against the standard of a reasonable person finding themselves in the situation in question, desiring the outcome but being permitted to balance against that desire various other factors which can include:
The financial effect on the person in question which obtaining the outcome would produce (both in terms of the cost of continued efforts and the actual financial effects of the outcome in question); and
The chances of achieving the desired result (i.e. if success becomes unlikely they are not required to continue).
The party can also take into account more distant effects of the outcome:
- Effect on existing relationships with third parties;
- Effect on reputation in the relevant market; and
- The cost and uncertainty of litigation with third parties which might arise out of seeking the outcome
By contrast a best endeavours clause can oblige a party, in some circumstances, to act against its own commercial interests. In fact the use of a best endeavours clause has been stated to pre-suppose that the party subject to the clause may be put to significant financial cost in complying.
There are, however, limits even to “best endeavours.”
It has been stated that a best endeavours clause does not require a party to do anything which might imperil its own solvency. Best endeavours clauses are also subject to a time limitation as endeavours are allowed to cease when they produce a return which is disproportionately small compared to the effort put in.
All Reasonable Endeavours
What of an “all reasonable endeavours” clause – frequently described as a hybrid clause?
Use of the word “all” suggests that the party is required to try multiple approaches to achieve the contractual objective – rather than leave it just at one. It has also been held, on occasion, that a party subject to an all reasonable endeavours clause is not required to sacrifice its own commercial interests to achieve the desired outcome (although there are also contrary decisions).
In general it is accepted that “all reasonable endeavours” is distinct from and more onerous than reasonable endeavours, the level of obligations falling somewhere between reasonable endeavours and best endeavours. The precise point at which it falls is, however, the subject of continuing debate.
It needs to be borne in mind that the above can only ever be a guide because the Courts have been very specific that the exact meaning of any phrase used in a particular agreement will always depend on the commercial context in which the agreement was originally made. It has also been held that where specific steps are set out in the agreement and there is also an endeavours obligation the specified steps will remain binding even if they would not generally be covered by an endeavours clause of the type used.
Nonetheless the above can be a useful guide when agreeing that one or other party to an agreement can (or must) “try try again.” You should therefore always be circumspect about agreeing to a “best endeavours” clause if you are the person taking on the obligation. On the other hand, if you are expecting someone else to “try” to do something, be aware of the limitations if “reasonable endeavours” are agreed.
Remember, it is always better (and usually significantly cheaper) to take advice before committing yourself to an agreement, rather than finding out later that you have agreed to something different from what you expected.
I have written a book on Ten Common Mistakes Businesses Make with the Law. To download a free copy of the book go to Martin Reynolds’ Book on Business Law. If you would prefer to meet face to face to discuss your business needs call 0118 958 9711 and speak with my assistant, Ummay Masood, to fix an appointment. You can book a one-hour fixed-fee commercial contracts consultation at our offices in Queens Road, Reading, Berkshire for just £95.
If you’ve been asked to sign a conditional contract and would like legal advice on how or whether to proceed, we can help. You can book a one hour fixed-fee commercial contract consultation for just £95 to discuss the contract at our offices in Queens Road, Reading, Berkshire.